A Note on Sector, Rating, and Maturity Effects on Risk Premia
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.
Volume (Year): 3 (2004)
Issue (Month): 3 (December)
|Contact details of provider:|| Postal: |
Web page: http://www.ijbe.org/
More information through EDIRC
References listed on IDEAS
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.:
- 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.
- Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
- Drakos, Konstantinos, 2002. "Common Factors in Eurocurrency Rates: A Dynamic Analysis," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 164-184.
- John M. Griffin & G. Andrew Karolyi, .
"Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies,"
Research in Financial Economics
9608, Ohio State University.
- Griffin, John M. & Andrew Karolyi, G., 1998. "Another look at the role of the industrial structure of markets for international diversification strategies," Journal of Financial Economics, Elsevier, vol. 50(3), pages 351-373, December.
- Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
- Cooper, Ian A & Mello, Antonio S, 1991. " The Default Risk of Swaps," Journal of Finance, American Finance Association, vol. 46(2), pages 597-620, June.
- 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.
- 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.
- 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.
- 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.
- Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
- Fase, M M G, 1976. "The Interdependence of Short-Term Interest Rates in the Major Financial Centres of the World: Some Evidence for 1961-1972," Kyklos, Wiley Blackwell, vol. 29(1), pages 63-96.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:3:y:2004:i:3:p:201-216. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yi-Ju Su)
If references are entirely missing, you can add them using this form.