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Determinants of euro-denominated corporate bond spreads

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  • Krylova, Elizaveta

Abstract

This paper computes time-varying indicators of the relative importance of different credit spread determinants, including rating, sector and country attribution as well as the coupon rate, maturity and liquidity on the basis of the comprehensive dataset of individual bonds. Additionally, it decomposes variances of rating-specific (country- and sector-specific) spread indices into the impacts of explanatory variables. Both cross-sectional and time series analyses confirm that the rating effect was the major driver of corporate bond spreads during the pre-crisis period, while the recent financial crisis was characterised by increased cross-country and cross-sector heterogeneity. The sector effects in corporate spreads together with the rating effects for high-rated and low-rated bonds are found to be more closely linked to default rates and stock indices, whereas the common effect also to be linked to business cycle conditions. The dataset also allows documenting a break-up in the existence of country ceilings for corporate bond ratings during the crisis. JEL Classification: G12, C21, C22, E44

Suggested Citation

  • Krylova, Elizaveta, 2016. "Determinants of euro-denominated corporate bond spreads," Working Paper Series 1912, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20161912
    Note: 450747
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1912.en.pdf
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    References listed on IDEAS

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    1. Houweling, Patrick & Mentink, Albert & Vorst, Ton, 2005. "Comparing possible proxies of corporate bond liquidity," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1331-1358, June.
    2. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453 World Scientific Publishing Co. Pte. Ltd..
    3. 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 449-470, May.
    4. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc.
    5. 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.
    6. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
    7. Baele, Lieven & Ferrando, Annalisa & Hördahl, Peter & Krylova, Elizaveta & Monnet, Cyril, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
    8. Jens H. E. Christensen, 2008. "The corporate bond credit spread puzzle," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar14.
    9. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    10. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
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    Cited by:

    1. Paul J.J. Welfens & Samir Kadiric, 2017. "Neuere Finanzmarktaspekte von Bankenkrise, QE-Politik und EU-Bankenaufsicht," EIIW Discussion paper disbei239, Universitätsbibliothek Wuppertal, University Library.

    More about this item

    Keywords

    corporate bond spreads; credit risk;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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