Does fundamental volatility help explain credit risk?

Accounting

Social Sciences Research Network

Correia M;Kang J;Richardson S A

Scott Richardson

2015

Asset volatility is a key variable in understanding credit risk. We evaluate alternative measures of asset volatility using information from both market (i.e., historical equity and credit market returns and equity option markets) and accounting (i.e., financial statements) sources. For a large sample of U.S. firms, we find that combining information about asset volatility from market and accounting sources improves the explanatory power of corporate bankruptcy models and cross-sectional variation in credit spreads. Market based (accounting) measures of asset volatility appear to reflect systematic idiosyncratic) sources of volatility, and combining both sources of information generates a superior measure of total asset volatility.

credit spreads; volatility; bankruptcy; default

Social Sciences Research Network

No

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