Contagion & Corporate Credit

Contrary to what most investors believe, empirical studies of corporate bond premia have found that only a small fraction of observed credit spreads can be explained by expected losses from defaults.

For example, research has found that the contemporaneous return of the S&P 500 Index is highly significant when determining the changes in credit spreads across bond portfolios, with the sign being negative. The relationship increases as you move to lower-grade credit categories.

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