Value investing in credit markets

Maria Correia, Scott Richardson, İrem Tuna

Review of Accounting Studies · 2012 · Volume 17 · Issue 3

Abstract

We outline a parsimonious empirical model to assess the relative usefulness of accounting- and equity market-based information to explain corporate credit spreads. The primary determinant of corporate credit spreads is the physical default probability. We compare existing accounting-based and market-based models to forecast default. We then assess whether the credit market completely incorporates this default information into credit spreads. We find that credit spreads reflect information about forecasted default rates with a significant lag. This unique evidence suggests a role for value investing in credit markets.

Keywords

Credit markets, CDS, Bonds, Default prediction

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