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Empirical analysis of credit spread changes of US corporate bonds

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  • Loncarski, Igor
  • Szilagyi, Peter G.

Abstract

In this paper we investigate the short-term credit spread dynamics of quality US corporate bonds, building on the Longstaff and Schwartz (1995) two-factor model. We find that changes in credit spreads usually display a significant negative relationship with changes in both the risk-free short interest rate and equity index returns as a proxy for asset values. Somewhat puzzlingly, however, we find that these variables do not yield a significant contribution to variations in spreads at maturities between 10 and 15years. We also argue that the relative illiquidity of the secondary market for corporate bonds may not generally allow for the immediate incorporation of information into bond prices, which affects spreads significantly.

Suggested Citation

  • Loncarski, Igor & Szilagyi, Peter G., 2012. "Empirical analysis of credit spread changes of US corporate bonds," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 12-19.
    • Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:12-19
    DOI: 10.1016/j.irfa.2012.06.011
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    Cited by:

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    2. Akhilesh Prasad & Priti Bakhshi & Arumugam Seetharaman, 2022. "The Impact of the U.S. Macroeconomic Variables on the CBOE VIX Index," JRFM, MDPI, vol. 15(3), pages 1-25, March.
    3. Saeed, Momna & Elnahass, Marwa & Izzeldin, Marwan & Tsionas, Mike, 2021. "Yield spread determinants of sukuk and conventional bonds," Economic Modelling, Elsevier, vol. 105(C).
    4. Batten, Jonathan A. & Jacoby, Gady & Liao, Rose C., 2014. "Corporate yield spreads and real interest rates," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 89-100.
    5. Rong-Xi Zhou & Ya-Hui Xiong & Tian-Hao Liu & Jing Li, 2019. "Macroeconomic Determinants of Credit Spreads: An Empirical Comparison between Chinese and American Corporate Bonds," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(5), pages 604-616, May.

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    More about this item

    Keywords

    Credit spreads; Interest rate risk; Credit risk; Equity factor;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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