Corpus ID: 17683138

Humpbacks in Credit Spreads

  title={Humpbacks in Credit Spreads},
  author={Deepak Agarwal and J. Bohn},
Models of credit valuation generally predict a hump-shaped spread term structure for low quality issuers. This is understood to be driven by the shape of the underlying conditional default probabilities curve. We show that (a) recovery assumptions and (b) deviation of bond's price from its par value can also drive different term structure shapes. Our analysis resolves conflicting empirical evidence on the shape of speculative grade spread curves and explains the related existing theoretical… Expand

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