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RFS Advance Access originally published online on November 3, 2004
Review of Financial Studies 2005 18(1):165-195; doi:10.1093/rfs/hhi009
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The Review of Financial Studies Vol. 18, No. 1 © 2005 The Society for Financial Studies; all rights reserved.

Is Default Event Risk Priced in Corporate Bonds?

Joost Driessen
University of Amsterdam

Address correspondence to: Joost Driessen, Finance Group, Faculty of Economics and Econometrics, University of Amsterdam, Roetersstraat 11, 1018 WB, Amsterdam, The Netherlands, or e-mail: j.j.a.g.driessen@uva.nl

This article provides an empirical decomposition of the default, liquidity, and tax factors that determine expected corporate bond returns. In particular, the risk premium associated with a default event is estimated. The intensity-based model is estimated using bond price data for 104 US firms and historical default rates. Significant risk premia on common intensity factors and important tax and liquidity effects are found. These components go a long way towards explaining the level of expected corporate bond returns. Adding a positive default event risk premium helps to explain the remaining error, although this premium cannot be estimated with high statistical precision.


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