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Empirical analysis of credit spread changes of US corporate bonds

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  • Loncarski, Igor
  • Szilagyi, Peter G.

Abstract

In this paper we investigate the short-term credit spread dynamics of quality US corporate bonds, building on the Longstaff and Schwartz (1995) two-factor model. We find that changes in credit spreads usually display a significant negative relationship with changes in both the risk-free short interest rate and equity index returns as a proxy for asset values. Somewhat puzzlingly, however, we find that these variables do not yield a significant contribution to variations in spreads at maturities between 10 and 15years. We also argue that the relative illiquidity of the secondary market for corporate bonds may not generally allow for the immediate incorporation of information into bond prices, which affects spreads significantly.

Suggested Citation

  • Loncarski, Igor & Szilagyi, Peter G., 2012. "Empirical analysis of credit spread changes of US corporate bonds," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 12-19.
  • Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:12-19
    DOI: 10.1016/j.irfa.2012.06.011
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    References listed on IDEAS

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    1. Jean Helwege & Christopher M. Turner, 1999. "The Slope of the Credit Yield Curve for Speculative-Grade Issuers," Journal of Finance, American Finance Association, vol. 54(5), pages 1869-1884, October.
    2. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
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    5. Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
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    11. 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.
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    Cited by:

    1. Batten, Jonathan A. & Jacoby, Gady & Liao, Rose C., 2014. "Corporate yield spreads and real interest rates," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 89-100.

    More about this item

    Keywords

    Credit spreads; Interest rate risk; Credit risk; Equity factor;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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