Abstract
Models of integrated asset markets predict that the debt and equity of the same firm have similar exposure to systematic risk. However, controlling for default probability, firms with a higher proportion of asset level systematic risk do not have commensurately higher spreads on either their vanilla bonds or synthetic bonds derived from option prices. More, the equity and debt of a firm do not share correlated factor exposures or expected returns as predicted in this class of models. In line with extent empirical asset pricing research, systematic risk proportion does explain credit spreads when estimated from a firm's bond returns. These results do not appear to be driven by differential exposure to volatility shocks and support a segmented markets approach to pricing a firm's securities.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
