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Euro corporate bonds risk factors

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Author Info
Castagnetti, Carolina
Rossi, Eduardo

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Abstract

This 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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13440.

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Date of creation: 16 Oct 2008
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Handle: RePEc:pra:mprapa:13440

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Related research
Keywords: Euro Corporate Bonds; Cross Section Dependence; Common Correlated Effects; Yield Curve;

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G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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