IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp2467.html
   My bibliography  Save this paper

A New Test for an Old Puzzle

Author

Listed:
  • Lorenzo Bretscher

    (Swiss Finance Institute - HEC Lausanne; Centre for Economic Policy Research (CEPR))

  • Peter Feldhütter

    (Copenhagen Business School)

  • Andrew Kane

    (Fuqua School of Business, Duke University)

  • Lukas Schmid

    (University of Southern California - Marshall School of Business)

Abstract

Traditional tests of the credit spread puzzle are imprecise. We show that a key input of these tests, the equity Sharpe ratio, is difficult to estimate in available empirical samples. Instead, we show that the difference between the Sharpe ratios of debt returns and equity returns provides a more precise test. Using the new test we find no evidence for a credit spread puzzle in the corporate bond market: after controlling for the unexpected decline in interest rates beginning in the 1990s, the Sharpe ratios of equity and bonds of high quality firms are nearly identical. However, we uncover a new puzzle in the market for bank debt: loan returns have higher Sharpe ratios than equity returns.

Suggested Citation

  • Lorenzo Bretscher & Peter Feldhütter & Andrew Kane & Lukas Schmid, 2024. "A New Test for an Old Puzzle," Swiss Finance Institute Research Paper Series 24-67, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2467
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4667213
    Download Restriction: no
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp2467. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.