Abstract:

Using Merton's structural model， the theoretical relationship between extreme tail risk of equity and credit spread of corporate bonds is established. Theoretically， credit spread is an increasing function of stock extreme tail risk with leverage ratio as the intermediary variable. The empirical Chinese results show that， completely consistent with the theoretical results， the credit spread is significantly positively related with the extreme tail risk and the empirical results are robust under the considered control variables. The mechanisms are empirically analyzed and it is found that the increaseof extreme tail risk can cause the increasing of credit spread by the leverage ratio. The results are helpful to understand the causes of “credit spreads puzzle”， and provide important empirical evidence for the stochastic volatility and jump-diffusion models to fit the credit spread well in practice.C{S}_{i,t}=\text{?}\alpha +{\beta }_{\mathrm{1}}\times ETRis{k}_{j,i,t}+{\beta }_{\mathrm{2}}^{\text{'}}\times Fir{m}_{i,t}+{\beta }_{\mathrm{3}}^{\text{'}}\times Macr{o}_t+{\delta }_i+{\lambda }_t+{?}_{i,t},\text{???}j=\mathrm{1},\text{?}\mathrm{2}. Where is the credit spreads of corporate bonds，ETRis{k}_{j,i,t} is the extreme tail risk of equityi with j-order.Fir{m}_{i,t} and Macr{o}_trepresent the control variables at the corporate and macro levels. To check the impacts of extremeequity tail risk on the credit spread of corporate bonds， the following regression equation：is used 827 corporate bonds publicly issued in China's bond market from January 2009 to January 2020 are selected as bond samples，and the matching equity data of 550 companies. There are 23429 sample data in the panel. All data comes from CSMAR databaseand Wind database.It is proved the positive correlation between extreme tail risk and corporate bond credit spread both theoretically and empirically. After controlling the company and macro levels control variables， the results remain unchanged. The difference tests show that the credit spread of company with low long-term debt ratio or low credit rating are more sensitive to the extreme tail risk of equity. Extreme tail risk in corporate equity has also become more sensitive to credit spreads after the stock market crash. Mechanism analysis found that the extreme tail risk of the company's equity will affect the credit spread of corporate bonds through channels such as the company's asset volatility and leverage ratio. This is also helpful for understanding the reasons for the “credit spreads puzzle”.

Key words: Extreme tail risk, credit spread, default model, idiosyncratic volatility