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Abstract

We estimate the nondefault component of corporate bond yield spreads and examine its relationship with bond liquidity. We measure bond liquidity using intraday transactions data and estimate the default component using the term structure of credit default swaps (CDS) spreads. With swap rate as the risk free rate, the estimated nondefault component is generally moderate but statistically significant for AA-, A-, and BBB-rated bonds and increasing in this order. With Treasury rate as the risk free rate, the estimated nondefault component is the largest in basis points for BBB-rated bonds but, as a fraction of yield spreads, it is the largest for AAA-rated bonds. Controlling for the unobservable firm heterogeneity, we find a positive and significant relationship between the nondefault component and illiquidity for investment-grade bonds but no significant relationship for speculative-grade bonds. We also find that the nondefault component comoves with indicators for macroeconomic conditions.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 022011.

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Length: 49 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:hkm:wpaper:022011

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Related research

Keywords: Corporate Bond Yield Spreads; Credit Default Swaps; Liquidity; CDS-Bond Basis;

Other versions of this item:

Find related papers by JEL classification:

• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
• G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
• G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-03-12 (All new papers)
• NEP-BAN-2011-03-12 (Banking)
• NEP-MST-2011-03-12 (Market Microstructure)

References

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Cited by:

1. Jens Hilscher & Joshua M. Pollet & Mungo Wilson, 2011. "Are credit default swaps a sideshow? Evidence that information flows from equity to CDS markets," Working Papers 35, Brandeis University, Department of Economics and International Businesss School, revised Oct 2012.
2. Kucuk, Ugur N., 2010. "Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market," MPRA Paper 27428, University Library of Munich, Germany.

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