Coporate Bond Valuation and Credit Spreads : Lessons from the Finacial Crisis.

Summary The objective of this thesis is to contribute to the improvement of the valuation of corporate bonds, in particular by trying to draw lessons from the recent economic and financial crisis. In order to achieve this objective, we propose an approach based on credit spreads. We start, in the first chapter, with an analysis of the main existing valuation models, which we reformulate from the point of view of spreads and simulate numerically. We show that, despite the attractive features of structural-type models, they have several shortcomings that can be misleading, especially in a crisis context. In the second and third chapters, we focus on empirical spreads, which we analyze during the subprime and eurozone crises. Through: (i) descriptive analysis, (ii) principal component analysis, and (iii) statistical regression analysis, we shed light on several factors affecting spread movements that are not captured by existing models. Among these factors, we show: (i) that the wave of bank bailouts during the crisis had a significant effect on credit spreads, and (ii) that the size of a firm also has an effect on its spreads. Based on these empirical results, in a fourth chapter we propose a contribution to the structural modeling of corporate bonds, which takes into account the possibility of firms to negotiate a bailout in case of distress. Using this model, we manage, on the one hand, to reproduce the empirical observations of lower spreads for higher bailout probabilities (as is the case for large banks), and on the other hand, to fill several gaps in existing models, such as simple bankruptcy mechanisms, or low credit spreads for short maturities.