Credit Spreads during the Global Financial Crisis: Evidence from the Japanese Bond Market

This paper uses credit spread data on Japanese bond indices to examine the possibility of a change in the determinants of daily credit spreads after the outbreak of the global financial crisis of 2007. A set of variables identified by prior research are used in a GARCH setting to explain credit spread changes both before and after the start of the crisis. The findings indicate that, overall, the coefficient estimates of the two bond market factors, namely changes in the spot rate and changes in the slope of the treasury yield curve, are consistent with prior literature. Moreover, the direction of the relationship is the same during the two periods. On the other hand, the relationship between credit spread changes and the two stock market factors, namely stock market index returns and changes in the implied index option volatility, is weak and sensitive to the period examined. Finally, the liquidity factor has a weak impact in both periods. It is also notable that the explanatory power of the empirical model used in the paper falls during the crisis.