The Determinants of Credit Spread Changes PDF Download

Author: Pierre Collin Dufresne
Publisher:
ISBN:
Category :
Languages : en
Pages : 31

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Author: Pierre Collin-Dufresne
Publisher:
ISBN:
Category :
Languages : en
Pages : 33

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Using straight industrial bonds with quoted prices, we investigate the determinants of credit spread changes. We find the variables that should in theory determine credit spread changes in fact have limited explanatory power. Further, the residuals from this first-pass regression are highly cross-correlated, and principal components analysis strongly suggests they are driven by a single common factor. We investigate several macro-economic and financial variables as candidate proxies for this factor. We cannot, however, find any set of variables which explain this common systematic factor. Our results suggest the corporate bond market is a segmented market driven by corporate bond specific supply/demand shocks.

Author: Julien Yerly
Publisher:
ISBN:
Category :
Languages : en
Pages : 88

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Author: Jing-Zhi Huang
Publisher:
ISBN:
Category :
Languages : en
Pages :

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We examine the question of the determinants of corporate bond credit spreads using both weekly and monthly option-adjusted spreads for nine corporate bond indices from Merrill Lynch from January 1997 to July 2002. We find that the Russell 2000 index historical return volatility and Conference Board composite leading and coincident economic indicators have significant power in explaining credit spread changes, especially for high yield indices. Furthermore, these three variables plus the interest rate level, the historical interest rate volatility, the yield curve slope, the Russell 2000 index return, and the Fama-French [1996] high-minus-low factor can explain more than 40% of credit spread changes for five bond indexes. In particular, these eight variables can explain 67.68% and 60.82% of credit spread changes for the B- and BB rated indexes, respectively. Our analysis confirms that credit spread changes for high-yield bonds are more closely related to equity market factors and also provides evidence in favor of incorporating macroeconomic factors into credit risk models.

Author: Bo Wang
Publisher:
ISBN:
Category :
Languages : en
Pages : 21

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Based on the structural model, macroeconomic and liquidity factors are tested against credit spread changes in American OTC corporate bonds. I discovered that the volatility of long run Treasury yield has even greater explanatory power than the yield itself. Macroeconomic indicators, such as Wilshire 5000 Total Market Index, have significant explanatory power over credit spread changes while there is only weak evidence that a common liquidity factor is missing from the model.

Author: Olfa Maalaoui Chun
Publisher:
ISBN:
Category :
Languages : en
Pages : 48

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Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. We show that a single regime model hides the fact that the explanatory variables take on different loadings across changing patterns in credit spreads. We capture these hidden effects by modeling endogenous (rating-specific) regimes for credit spreads. We find that in a two regime-based model traditional determinants have significant explanatory power consistent with the prediction of structural models, yet their importance changes across regimes -- some variables have their effects strengthen, weaken or even reverse signs across regimes. We also investigate the differing behavior of these loadings across different specifications of the economic cycle and find that endogenous regimes best capture the hidden effects of these variables with the highest explanatory power for the same set of variables.

Author: Doron Avramov
Publisher:
ISBN:
Category :
Languages : en
Pages :

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New evidence is reported on the empirical success of structural models in explaining changes in corporate credit risk. A parsimonious set of common factors and company-level fundamentals, inspired by structural models, was found to explain more than 54 percent (67 percent) of the variation in credit-spread changes for medium-grade (low-grade) bonds. No dominant latent factor was present in the unexplained variation. Although this set of factors had lower explanatory power among high-grade bonds, it did capture most of the systematic variation in credit-spread changes in that category. It also subsumed the explanatory power of the Fama and French factors among all grade classes.

Author: Darrell Duffie
Publisher: Princeton University Press
ISBN: 1400829208
Category : Business & Economics
Languages : en
Pages : 488

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This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models. Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps--for example, those associated with Poisson arrivals--in order to accommodate surprise events such as bond defaults. Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.

Author: Fabio Notarangelo
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Diese Arbeit untersucht das Verhalten von Credit Spread Bewegungen während der Finanzkrise mit Hilfe monatlicher Credit Default Swap Daten von Juli 2004 und Juni 2010. Ziel ist es zu analysieren, wie sich Determinanten von Credit Spreads entwickelt haben während der finanziellen Notlage ab Mitte 2007. Mittels linearer Regressionen werden auf Robert Mertons (1974) Strukturmodell basierende Determinanten von Credit Spread in den Zeiträumen vor und während der Krise analysiert. Diese Treiber umfassen zinsdynamische, makroökonomische und unternehmensspezifische Variablen sowie Konjunkturindikatoren. Der Vergleich der beiden Time Sets zeigt ein bedeutender Anstieg der Erklärungskraft der Variablen im Zeitraum der Finanzkrise. Es wird gezeigt, dass in Zeiten einer stabilen Wirtschaft Spreadänderungen vermehrt von makroökonomischen Faktoren beeinflusst werden, während unternehmensspezifische Faktoren in Zeiten der Krise den grössten Einfluss üben. Obwohl die vorliegende Arbeit eine Vielzahl von Untersuchungen zu Credit Spread Determinanten bestätigt, sind die Variablen nur teilweise verantwortlich für Bewegungen der Spreads.

Author: Sebastian Wilde
Publisher: GRIN Verlag
ISBN: 334670761X
Category : Business & Economics
Languages : en
Pages : 79

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Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.