The Credit Spread: Risk-Free Rate in the Model

Abstract

This paper proposes a parsimonious credit spread estimation model for valuation of corporate bonds in data-scarce markets. We emphasize the importance of incorporating the risk-free rate directly into credit spread determination. Our model aligns with established literature and demonstrates the ability to capture the observed influence of risk-free rates on credit spreads across economies. We posit that models omitting the risk-free rate component may underestimate credit spreads, particularly impactful in emerging markets with elevated default probabilities and high risk-free rates. Finally, we discuss practical applications of the model, including exchange rate premium calculations, policy analysis, and negative yield spread analysis.

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Published
2024-09-30
How to Cite
GHAZARYAN, Amasya; ASOYAN, Satine; MELIK-PARSADANYAN, Vahagn. The Credit Spread: Risk-Free Rate in the Model. Theoretical and Practical Research in Economic Fields, [S.l.], v. 15, n. 3, p. 647 - 658, sep. 2024. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/8594>. Date accessed: 21 nov. 2024. doi: https://doi.org/10.14505/tpref.v15.3(31).11.