Culp, Christopher L. <br/><br/>
Option-Based Credit Spreads / 
Christopher L. Culp, Yoshio Nozawa, Pietro Veronesi. 
 - Cambridge, Mass.  National Bureau of Economic Research  2014. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w20776 .
 - Working Paper Series (National Bureau of Economic Research)  no. w20776. .
<br/><br/> December 2014. 
<br/><br/> We present a novel empirical benchmark for analyzing credit risk using "pseudo firms" that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo-firm assets. Empirically, like corporate spreads, pseudo-bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' over-estimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads, but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads. 
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