Dear writer,
Thanks for the paper you have sent me. Kindly find below my comments regarding some unclear points or points to be fixed.
Thanks
1/your paper in general + main question and sub-questions:
My comment: According to the thesis proposal you wrote, and based on the main question and sub-questions you included, I’ve noticed that the topic moved from studying “Impact of default Risk on Corporate Bond Pricing Case of European markets” to “Impact of default Risk on Credit Spread”. Why this change ?
Kindly stick to the requested topic which is “Impact of default Risk on Corporate Bond Pricing Case of European markets”. If the study should be conducted by investigating credit spread, kindly make the necessary changes to highlight the relation between Credit Spread, Default risk and Corporate bonds pricing. Also, kindly include the impact on corporate bonds pricing in the main question and also in a sub-question, as the study should make conclusion on corporate bonds pricing and how it is impacted by default risk.
I use the structural model that was founded by Merton. The model is based on credit spread. Therefore, I use credit spread as a proxy for bond prices. They are related by the formula Effective Interest Rate = Coupon Rate/Bond Price.
I have clarified in the paper.
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2/ Your statement: Non-callable bonds are bonds without maturity
My comment:
Can you motivate your definition ? Wikipedia, investopedia and other sites are providing different definition “A non-callable bond is a bond that is not able to be redeemed prior to maturity”. Probably you are confusing non-callable with Perpetual Bonds. Please ensure which bonds you are using, and clearly state why do you think this kind of bonds would simplify the study and lead to consider that spread will be explained only by credit risk with ignoring the liquidity premium?
I meant perpetuity bonds. I have made changes to that effect.
3/ Your statement: This study seeks to investigate the impact of default risk on corporate bonds in the European markets. The credit spread is explained by two key factors
My comment:
Why we move from investigating on impact of default risk to talk about credit spread ? kindly motivate this “change” of the focus. Why do you need to study credit spread to answer the main question requested n my order “impact of default risk on corporate bonds pricing”
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4/ Your statement: Literature on default risk in the European market is almost non-existent
My comment:
Can you motivate your statement ? why do you think that there is a lack of literature on default risk in the EU markets ?
I have highlighted in the paper that studies om default risk in the EU market on bond pricing are almost non-existent. Most studies focus on the USA. I indicated it as a motivation for the study. Given the scarcity of literature on EU market, the paper seeks to fill the knowledge gap.
5/ Your statement: this study will inform companies on finance cost mitigationend of paragraph
My comment:
Please elaborate more and explain how this study will inform the companies on finance cost mitigation. Could you please reformulate clearly what is the contribution of the study.
I have added an explanation.
6/ Your statement: This study will investigate the impact of default risk on corporate bonds
My comment:
Please remember that the topic is investigating the impact of default risk on corporate bond pricing more precisely! So please reformulate your statement.
As stated the study is using credit spread as a proxy of bond prices to allow it to apply the structural model. The model is widely used on studies of default risk.
7/ Your statement: The study will be restricted to the last two years due to restrictions in availability of data.
My comment:
Can you motivates this statement ? why such constraint exists on available data in European market? Which data / time series was exactly available only for the last 2 years ?
Unlike US financial markets where data is readily available for public consumption for free, data on EU markets are not readily available. However, data merchants such as Bloomberg can provide the data at a cost. I had to restrict the time frame which is partly subjective. Therefore, you can include a time frame that you feel is appropriate.
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8/ Empirical Test
My comments:
Please state the origin/source of the regression formula (state the reference, the original formula, and if any changes / assumptions were made to come out with a simplified regression formula), and explain why it is a linear regression, and if any simplification / assumptions are made kindly mention them.
The study will use the structural model developed by Merton. I have included the explanatory variables based on literature as discussed in the paper. At this stage, I can only make reference to the direction of the causal relationship (the dependent and independent variables) based on literature. The specific functional form will depend on a preliminary analysis of the data where OLS assumptions will tested. If they are met then, a simple linear regression will be applied. If they are not met, then other model specifications will be tested to identify the best model fit.
Please enumerate the different tests to be conducted with hypothesis and alternative hypothesis to be tested, and clearly state how these hypothesis/tests will answer the sub-questions. If any auxiliary regression/unit root testetc needs to be used to answer any sub-question kindly mention it.
I will use t-test for regression co-efficient as discussed. I have added the hypothesis.
Kindly add a legend defining the endogenous and exogenous variables used in the regression as well (meaning of all variables should be added beside the regression formula)
I have added
