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The Nonlinear Dynamics of Corporate Bond Spreads: Regime-Dependent Effects of their Determinants

Author

Listed:
  • Fischer Henning

    (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany)

  • Stolper Oscar

    (Behavioral Finance Research Group, University of Marburg, Am Plan 1, 35032 Marburg, Germany)

Abstract

This paper studies the behavior of corporate bond spreads during different market regimes between 2004 and 2016. Applying a Markov-switching vector autoregressive (MS-VAR) model, we document that the dynamic impact of spread determinants varies substantially with market conditions. In periods of high volatility, systematic credit risk—rather than interest rate movements—contributes to driving up spreads. Moreover, while market-wide liquidity risk is not priced when volatility is low, it becomes a crucial factor during stress periods. Our results challenge the notion that spreads predominantly capture credit risk and suggest it must be reassessed during periods of financial distress.

Suggested Citation

  • Fischer Henning & Stolper Oscar, 2021. "The Nonlinear Dynamics of Corporate Bond Spreads: Regime-Dependent Effects of their Determinants," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 241(2), pages 187-238, April.
    • Handle: RePEc:jns:jbstat:v:241:y:2021:i:2:p:187-238:n:5
    DOI: 10.1515/jbnst-2020-0002
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    More about this item

    Keywords

    corporate bond spreads; regime dependency; Markov switching; vector autoregression; credit spread puzzle;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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