This paper describes an empirically motivated model of credit risk based on a study of the relation between returns to corporate bonds, government bonds and equities.

We describe an empirically motivated model of credit risk based on a study of the relation between returns to corporate bonds, government bonds and equities.  Examining almost 200,000 monthly return events spanning 6+ years, we find a clear systematic relationship between issuer credit quality, as measured by its bonds' yield spreads, an the attribution of its bonds' return to interest rate changes and the issuer's equity return.  Returns to high quality bond, with low...