Title: What is different about loans? An analysis of the risk structure of credit spreads

Authors: Andrea Resti, Andrea Sironi

Addresses: Centre for Applied Research in Finance (CAREFIN), Universita Luigi Bocconi, via Sarfatti 25, 20135, Milan, Italy. ' Centre for Applied Research in Finance (CAREFIN), Universita Luigi Bocconi, via Sarfatti 25, 20135, Milan, Italy

Abstract: While extensive research on the relationship between credit risk and spreads has been produced for bonds and loans separately, few studies have analysed them jointly. We derive a simple structural model where a stochastic default barrier accounts for informational noise, and differences between bond and loan spreads are explained through the different screening ability of bankers and bond-holders. We then test the model on a sample of 7,926 Eurobonds and 5,469 syndicated loans. Empirical results confirm the key finding of the model: while spreads increase as ratings worsen for both bonds and loans, the former show a steeper spread/rating relationship.

Keywords: Eurobonds; syndicated loans; credit ratings; credit spreads; default risk; credit risk.

DOI: 10.1504/IJBAAF.2010.032849

International Journal of Banking, Accounting and Finance, 2010 Vol.2 No.2, pp.130 - 155

Published online: 25 Apr 2010 *

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