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Euro corporate bonds risk factors

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  • Castagnetti, Carolina
  • Rossi, Eduardo

Abstract

This paper investigates the determinants of credit spread changes in Euro-denominated bonds. Because credit spread changes can be easily viewed as an excess return on corporate bonds over treasury bonds, we adopt a factor model framework, inspired by the credit risk structural approach. We try to assess the relative importance of market and idiosyncratic factors in explaining the movements in credit spreads. We adopt a heterogeneous panel with a multifactor error model and propose a two-step estimation procedure which yields consistent estimates of unobserved factors. The analysis is carried out with a panel of monthly redemption yields on a set of corporate bonds for a time span of three years. Our results suggest that the Euro corporate market is driven by observable and unobservable factors. Where the latter are identified through a consistent estimation of individual and common observable effects. We observe that the factors predicted by the structural model are not as relevant as in the case of the US market. The empirical results also suggest that an unobserved common factor has a significant role in explaining the systematic changes in credit spreads. However, contrary to the American evidence, it cannot be identified as a market factor.

Suggested Citation

  • Castagnetti, Carolina & Rossi, Eduardo, 2008. "Euro corporate bonds risk factors," MPRA Paper 13440, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13440
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Castagnetti, Carolina & Rossi, Eduardo & Trapani, Lorenzo, 2015. "Inference on factor structures in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 184(1), pages 145-157.
    2. Castagnetti, Carolina & Rossi, Eduardo, 2008. "Estimation methods in panel data models with observed and unobserved components: a Monte Carlo study," MPRA Paper 26196, University Library of Munich, Germany.
    3. Christian Klein & Christoph Stellner, 2014. "The systematic risk of corporate bonds: default risk, term risk, and index choice," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(1), pages 29-61, February.
    4. Anthony H. Tu & Cathy Yi-Hsuan Chen, 2016. "What Derives the Bond Portfolio Value-at-Risk: Information Roles of Macroeconomic and Financial Stress Factors," SFB 649 Discussion Papers SFB649DP2016-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. repec:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-1975-5 is not listed on IDEAS
    6. Bada, Oualid & Kneip, Alois, 2014. "Parameter cascading for panel models with unknown number of unobserved factors: An application to the credit spread puzzle," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 95-115.

    More about this item

    Keywords

    Euro Corporate Bonds; Cross Section Dependence; Common Correlated Effects; Yield Curve;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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