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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.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 24 (2012)
Issue (Month): C ()
Pages: 12-19

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Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:12-19

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Web page: http://www.elsevier.com/locate/inca/620166

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Keywords: Credit spreads; Interest rate risk; Credit risk; Equity factor;

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