What's Different about Loans? An Analysis of the Risk Structure of Credit Spreads

35 Pages Posted: 10 Sep 2008

See all articles by Andrea Resti

Andrea Resti

Bocconi University - Department of Finance

Andrea Sironi

Bocconi University - Department of Finance

Date Written: January 7, 2007

Abstract

While extensive research on the relationship between credit risk and spreads has been produced for bonds and loans separately, few studies have analyzed 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, spreads, default risk

JEL Classification: G15, G21, G28

Suggested Citation

Resti, Andrea and Sironi, Andrea, What's Different about Loans? An Analysis of the Risk Structure of Credit Spreads (January 7, 2007). SDA Bocconi Research Paper No. 186/07, Available at SSRN: https://ssrn.com/abstract=1265085 or http://dx.doi.org/10.2139/ssrn.1265085

Andrea Resti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Andrea Sironi

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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