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http://hdl.handle.net/2451/26752
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| Title: | Explaining Credit Spread Changes: Some New Evidence from Option-Adjusted
Spreads of Bond Indices |
| Authors: | Huang, Jing-zhi
Kong, Weipeng |
| Issue Date: | Jun-2003 |
| Series/Report no.: | S-CDM-03-08 |
| Abstract: | This paper revisits the question of the determinants of corporate bond
credit spreads using some new explanatory variables with both weekly and
monthly option-adjusted credit spreads of corporate bond indices from
Merrill Lynch. We find that among the new variables, the interest rate
historical volatility, the Russell 2000 index historical return
volatility and Conference Board leading and coincident economic indices
have significant power in explaining credit spread changes, especially
for high yield bond indices. Furthermore, these four variables plus the
interest rate level, the yield curve slope, the Russell 2000 index
return, and the Fama-French [1996] high-minus-low factor return could
explain more than 40% of credit spread changes in 5 out of 9
rating/maturity indices. In particular, these variables could explain
67.68% of the variation in B rated index credit spreads and 60.82% of
the variation in BB rated index credit spreads. The overall explanatory
power on credit spread changes achieved here is a notable improvement
over most previous studies using either option-adjusted index spreads or
individual corporate bond spreads. Our analysis confirms that high-yield
credit spread changes are more closely related with equity market
factors and also provides evidence in favor of incorporating
macroeconomic risk factors into credit risk models. |
| URI: | http://hdl.handle.net/2451/26752 |
| Appears in Collections: | Credit & Debt Markets
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