We use a panel of investment-grade corporate bonds to investigate why credit spreads are so much larger than expected losses from default. We begin by confirming that systematic factors contribute very little to spreads, even if higher moments or downside effects are incorporated.

Introduction to new research by Aneel Keswani, Reader in Finance at Cass Business School.
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We use a panel of investment-grade corporate bonds to investigate why credit spreads are so much larger than expected losses from default. We begin by confirming that systematic factors contribute very little to spreads, even if higher moments or downside effects are incorporated. Instead we show that spreads are strongly related to idiosyncratic-risk factors: not only is idiosyncratic equity volatility important (as documented in previous research), but so are also the idiosyncratic components of bond volatility and bond value-at-risk. Idiosyncratic bond volatility helps to explain spreads because it is a proxy for liquidity risk. Idiosyncratic bond value-at-risk is related to spreads because it captures the risk neutral left-skewness of the firm value distribution and we demonstrate that such skewness does exist by calibrating a Merton model to the observed spread/volatility relationship. Overall, credit spreads are large mainly because investors are averse to extreme losses on the downside.

The first introduction to Aneel Keswani's new research can be found here: The flow-performance relationship around the world.
A third introduction to Aneel Keswani's new research can be found here: Investor reaction to mutual fund performance.