Euro Corporate Bond Risk Factors
AbstractThis paper investigates the determinants of credit spread changes in Euro-denominated bonds. Because credit spread changes can be easily viewed as an excess return on corporate bonds over treasury bonds, we adopt a factor model framework, inspired by the credit risk structural approach. We try to assess the relative importance of market and idiosyncratic factors in explaining the movements in credit spreads. We adopt a heterogeneous panel with a multifactor error model and propose a two-step estimation procedure which yields consistent estimates of unobserved factors. The analysis is carried out with a panel of monthly redemption yields on a set of corporate bonds for a time span of three years. Our results suggest that the Euro corporate market is driven by observable and unobservable factors. Where the latter are identified through a consistent estimation of individual and common observable effects. We observe that the factors predicted by the structural model are not as relevant as in the case of the US market. The empirical results also suggest that an unobserved common factor has a significant role in explaining the systematic changes in credit spreads. However, contrary to the American evidence, it cannot be identified as a market factor.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.
Volume (Year): 28 (2013)
Issue (Month): 3 (04)
Contact details of provider:
Web page: http://www.interscience.wiley.com/jpages/0883-7252/
Other versions of this item:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Coakley, Jerry & Fuertes, Ana-Maria & Smith, Ron, 2006.
"Unobserved heterogeneity in panel time series models,"
Computational Statistics & Data Analysis,
Elsevier, vol. 50(9), pages 2361-2380, May.
- Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2004. "Unobserved Heterogeneity in Panel Time Series Models," Birkbeck Working Papers in Economics and Finance 0403, Birkbeck, Department of Economics, Mathematics & Statistics.
- M. Hashem Pesaran, 2004.
"Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,"
CESifo Working Paper Series
1331, CESifo Group Munich.
- M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
- Pesaran, M.H. & Yamagata. T., 2005.
"Testing Slope Homogeneity in Large Panels,"
Cambridge Working Papers in Economics
0513, Faculty of Economics, University of Cambridge.
- M. Hashem Pesaran & Takashi Yamagata, 2005. "Testing Slope Homogeneity in Large Panels," IEPR Working Papers 05.14, Institute of Economic Policy Research (IEPR).
- M. Hashem Pesaran & Takashi Yamagata, 2005. "Testing Slope Homogeneity in Large Panels," CESifo Working Paper Series 1438, CESifo Group Munich.
- Pesaran, M.H., 2004.
"‘General Diagnostic Tests for Cross Section Dependence in Panels’,"
Cambridge Working Papers in Economics
0435, Faculty of Economics, University of Cambridge.
- M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
- Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Pesaran, M. Hashem & Smith, Ron, 1995.
"Estimating long-run relationships from dynamic heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 79-113, July.
- Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
- Houweling, Patrick & Mentink, Albert & Vorst, Ton, 2005.
"Comparing possible proxies of corporate bond liquidity,"
Journal of Banking & Finance,
Elsevier, vol. 29(6), pages 1331-1358, June.
- Houweling, P. & Mentink, A.A. & Vorst, A.C.F., 2003. "Comparing possible proxies of corporate bond liquidity," Econometric Institute Research Papers EI 2003-49, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Duffee, Gregory R, 1999.
"Estimating the Price of Default Risk,"
Review of Financial Studies,
Society for Financial Studies, vol. 12(1), pages 197-226.
- Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-3, International Conferences on Panel Data.
- Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 541-552, November.
- John Y. Campbell & Glen B. Taksler, 2002.
"Equity Volatility and Corporate Bond Yields,"
NBER Working Papers
8961, National Bureau of Economic Research, Inc.
- Campbell, John & Taksler, Glen, 2003. "Equity Volatility and Corporate Bond Yields," Scholarly Articles 3153307, Harvard University Department of Economics.
- John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
- Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
- Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
- Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
- Briys, Eric & de Varenne, François, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January.
- Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
- Swamy, P A V B, 1970.
"Efficient Inference in a Random Coefficient Regression Model,"
Econometric Society, vol. 38(2), pages 311-23, March.
- Tom Doan, . "SWAMY: RATS procedure to compute a GLS matrix weighted estimator for a panel data set," Statistical Software Components RTS00206, Boston College Department of Economics.
- Landschoot, A. van, 2003. "The Term Structure of Credit Spreads on Euro Corporate Bonds," Discussion Paper 2003-046, Tilburg University, Center for Economic Research.
- Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
- Carolina Castagnetti & Eduardo Rossi & Lorenzo Trapani, 2012. "Inference on Factor Structures in Heterogeneous Panels," DEM Working Papers Series 002, University of Pavia, Department of Economics and Management.
- Christian Klein & Christoph Stellner, 2014. "The systematic risk of corporate bonds: default risk, term risk, and index choice," Financial Markets and Portfolio Management, Springer, vol. 28(1), pages 29-61, February.
- Castagnetti, Carolina & Rossi, Eduardo, 2008. "Estimation methods in panel data models with observed and unobserved components: a Monte Carlo study," MPRA Paper 26196, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.