An Integrated Analysis of the Fundamental Determinants of Credit Risk Premiums on Corporate Debt

Abstract

This research investigates the fundamental components of corporate credit spreads through an integrated examination of how well different models, default probability functions, and market factors explain CDS prices. Individual company yield spreads are discovered to be determined by the interrelated risks of cash, income, and valuation insolvency, along with various measures of systematic downside risk. The empirical findings indicate that the priced risk of a jump to and at default is well explained by those fundamentals, including in ex-post tests, although the financial determinants of credit spreads are found to vary significantly across different groups of companies.