Wu, Chunchi and Chih-Hsien Yu, "Risk Aversion and the Yield of Corporate Debt", Journal of Banking & Finance, Vol. 20, No. 2, (March 1996), pp. 267-281.
Abstract: This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions indicate that previous risk-neutrality models consistently overestimate the implied default rates of corporate bonds. The results also suggest that investors may have been adequately compensated for investment in risky bonds.
Keywords: Risk aversion, Bond yields.