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The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market

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  • Manfred Frühwirth
  • Paul Schneider
  • Leopold Sögner

Abstract

This article presents joint econometric analysis of interest rate risk, issuer†specific risk (credit risk) and bond†specific risk (liquidity risk) in a reduced†form framework. We estimate issuer†specific and bond†specific risk from corporate bond data in the German market. We find that bond†specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer†specific vs. bond†specific spread on the level and the volatility of the total spread. Issuer†specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk†free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock's return and the distance to default. For the bond†specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk†free term structure and the specific stock's return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.

Suggested Citation

  • Manfred Frühwirth & Paul Schneider & Leopold Sögner, 2010. "The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market," European Financial Management, European Financial Management Association, vol. 16(4), pages 658-685, September.
    • Handle: RePEc:bla:eufman:v:16:y:2010:i:4:p:658-685
    DOI: 10.1111/j.1468-036X.2009.00503.x
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    2. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Asia Aman, 2019. "Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions," JRFM, MDPI, vol. 12(4), pages 1-13, September.

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