Topic: Debt Dynamics and Credit Risk

Speaker: Stephen Schaefer, Professor of Finance, London Business School

Date: April 6, 2022 (Wednesday)

Time: 15:00-16:30

Location: 4-101

Language: English

 

Abstract:

We investigate how the dynamics of corporate debt policy affect the pricing of corporate bonds. We find empirically that debt issuance has a significant stochastic component that is imperfectly correlated with shocks to asset value.As a consequence, the volatility of leverage is significantly higher than asset volatility over short horizons. At long horizons, the relation between leverage and asset volatility is reversed due to mean reversion in leverage. We incorporate these debt dynamics into an otherwise standard structural model and compare the model’s ability to match the cross-section of US credit spreads with that of existing models. The model provides more accurate predictions of credit spreads in both the cross-section and the time series, particularly for short-maturity debt.

  

About the speaker:

Stephen Schaefer has published widely on fixed income markets, risk management, credit risk and financial regulation. His research includes a study on corporate debt default in the US over the past 150 years, which was awarded first prize in the 2011 Fama/DFA Award for the Best Paper Published in the Journal of Financial Economics in the areas of capital markets and asset pricing and the 2015 Jack Treynor Prize from the Q Group for a paper on the pricing of credit risky debt.

 

Professor Schaefer was formerly a faculty member at the Graduate School of Business at Stanford University. He has also been a visiting professor at the Universities of British Columbia, California (Berkeley), Cape Town, Chicago and Venice, where he was recently awarded an Honorary Fellowship. Today, he is the lead Academic Director for the London Business School’s AQR Asset Management Institute.

Outside academic life, he has consulted widely for a variety of financial institutions and is a co-author of two major reports for the Norwegian Ministry of Finance on the management of the Norwegian Government Pension Fund (the ‘Oil Fund’).

 

He has also been an independent board member of the Securities and Futures Authority; a senior research advisor to Moody’s KMV; a non-executive director of Tokai Bank Europe; a trustee-director of Smith Breeden Mutual Funds and a member of Moody’s Academic Research and Advisory Committee.