Asset Volatility

• In Event: Credit Risk

Abstract

Asset volatility is a key variable in understanding credit risk. We evaluate alternative measures of asset volatility using information from both market (i.e., historical equity and credit market returns and equity option markets) and accounting (i.e., financial statements) sources. For a large sample of U.S. firms, we find that combining information about asset volatility from market and accounting sources improves the explanatory power of corporate bankruptcy models and cross-sectional variation in credit spreads. Market based (accounting) measures of asset volatility appear to reflect systematic (idiosyncratic) sources of volatility, and combining both sources of information generates a superior measure of total asset volatility.

Authors

• Maria Correia, London Business School

• Johnny Kang, AQR Capital Management LLC

• Scott Richardson, London Business School