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A Note on Sector, Rating, and Maturity Effects on Risk Premia

  • Konstantinos Drakos

    (Department of Economics, University of Patras, Greece)

Focusing on a set of investment grade corporate yields covering four industries, three maturities, and four ratings, principal components analysis is employed in order to estimate the number of common factors that account for their sample covariance structure. The empirical findings suggest that a two-factor representation is statistically acceptable, a finding consistent with previous research as well as with existing theoretical models. Furthermore, we explore the role of rating, maturity, and sector in explaining cross-sectional differences across investment grade yields¡¦ risk premia. We conclude that these factors account for a large and significant part of the observed variation. Additionally, we are able to estimate the quantitative effect of these factors on the risk premium embodied in credit spreads.

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Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

Volume (Year): 3 (2004)
Issue (Month): 3 (December)
Pages: 201-216

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Handle: RePEc:ijb:journl:v:3:y:2004:i:3:p:201-216
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  10. Fase, M. M. G., 1973. "A principal components analysis of market interest rates in The Netherlands, 1962-1970," European Economic Review, Elsevier, vol. 4(2), pages 107-134, June.
  11. Trzcinka, Charles A, 1986. " On the Number of Factors in the Arbitrage Pricing Model," Journal of Finance, American Finance Association, vol. 41(2), pages 347-68, June.
  12. Kuo, Weiyu & E. Satchell, Stephen, 2001. "Global equity styles and industry effects: the pre-eminence of value relative to size," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 1-28, March.
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