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Investigating the determinants of corporate bond credit spreads in the euro area

Author

Listed:
  • Simone Letta

    (Bank of Italy)

  • Pasquale Mirante

    (Confcommercio-Imprese per l’Italia)

Abstract

The COVID-19 pandemic led to a surge in credit spreads that cannot be fully explained by a higher probability of issuer defaults. The sharp rise in spreads is consistent with a liquidity shock caused by heavy selling pressure that mainly affected the more liquid and safer bonds. Indeed, the results of a panel analysis confirm that the credit spread depends not only on idiosyncratic factors, such as duration and rating attribution, but also on liquidity and macroeconomic factors, especially in times of crisis. Furthermore, over the last decade, sustainability factors have increasingly affected the choices of bond investors. Our findings suggest that a better ESG performance may be associated with lower credit spreads.

Suggested Citation

  • Simone Letta & Pasquale Mirante, 2023. "Investigating the determinants of corporate bond credit spreads in the euro area," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 36, Bank of Italy, Directorate General for Markets and Payment System.
    • Handle: RePEc:bdi:wpmisp:mip_036_23
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    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2023-036/N.36-MISP.pdf
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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