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An empirical analysis of the relationship of bond yield spreads and macro economic factors

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  • George Athanassakos
  • Peter Carayannopoulos
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    Abstract

    This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industrial production), the opposite is true for utilities.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/096031001750071596
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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 11 (2001)
    Issue (Month): 2 ()
    Pages: 197-207

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    Handle: RePEc:taf:apfiec:v:11:y:2001:i:2:p:197-207

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    Cited by:
    1. Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor and Francis Journals, vol. 15(16), pages 1153-1164.
    2. Chee Jin Yap & Gerard Gannon, 2007. "Factors Affecting the Credit Spreads Behaviour of USD Malaysian Bonds," Accounting, Finance, Financial Planning and Insurance Series 2007_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    3. Gabe de Bondt, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 164, European Central Bank.
    4. C.R. McKenzie & Sumiko Takaoka, 2004. "The Impact of Bank Entry in the Japanese Corporate Bond Underwriting Market," Econometric Society 2004 Australasian Meetings 128, Econometric Society.
    5. Jonathan Batten & Warren Hogan & Gady Jacoby, 2005. "Measuring credit spreads: evidence from Australian Eurobonds," Applied Financial Economics, Taylor and Francis Journals, vol. 15(9), pages 651-666.
    6. Gabe de Bondt, 2004. "The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 219-228.

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