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An empirical analysis of the relationship of bond yield spreads and macro economic factors

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  • George Athanassakos
  • Peter Carayannopoulos

Abstract

This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industrial production), the opposite is true for utilities.

Suggested Citation

  • George Athanassakos & Peter Carayannopoulos, 2001. "An empirical analysis of the relationship of bond yield spreads and macro economic factors," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 197-207.
  • Handle: RePEc:taf:apfiec:v:11:y:2001:i:2:p:197-207
    DOI: 10.1080/096031001750071596
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    References listed on IDEAS

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    1. Gregory R. Duffee, 1996. "Treasury yields and corporate bond yield spreads: an empirical analysis," Finance and Economics Discussion Series 96-20, Board of Governors of the Federal Reserve System (U.S.).
    2. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
    3. Gregory R. Duffee, "undated". "Treasury Yields and Corporate Bond Yield Spreads: An Empirical Analysis," Finance and Economics Discussion Series 1996-20, Board of Governors of the Federal Reserve System (U.S.).
    4. Edwin J. Elton & T. Clifton Green, 1997. "Tax and Liquidity Effects in Pricing Government Bonds," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-029, New York University, Leonard N. Stern School of Business-.
    5. Edwin J. Elton & T. Clifton Green, 1997. "Tax and Liquidity Effects in Pricing Government Bonds," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-2, New York University, Leonard N. Stern School of Business-.
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    Cited by:

    1. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 0164, European Central Bank.
    2. repec:exp:finnce:v:5:y:2017:i::p:49-72 is not listed on IDEAS
    3. Takaoka, Sumiko & McKenzie, C.R., 2006. "The impact of bank entry in the Japanese corporate bond underwriting market," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 59-83, January.
    4. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.
    5. Gabe de Bondt, 2004. "The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 219-228.
    6. Jonathan Batten & Warren Hogan & Gady Jacoby, 2005. "Measuring credit spreads: evidence from Australian Eurobonds," Applied Financial Economics, Taylor & Francis Journals, vol. 15(9), pages 651-666.
    7. Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1153-1164.

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