Joost Driessen Discusses Liquidity Effects in Bonds
Put away the crossword and the sudoku: it’s the “credit spread puzzle” that’s occupying some leading financial minds. On May 3, 2012, Prof. Joost Driessen of Tilburg University spoke to a Global Association of Risk Professionals (GARP) webinar audience about recent work done by his research group to solve this puzzle. The term “credit spread puzzle” refers to the fact that credit spreads are much higher than can be justified by historical default losses. A typical example Driessen cited was a long-term AA bond that had an expected default loss of 0.06% yet whose average credit spread, calculated using real-life data, was 1.18%. More […]