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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27150
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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: | Mar-2003 |
| Series/Report no.: | FIN-03-013 |
| Abstract: | We examine the question of the determinants of corporate bond credit
spreads using both weekly and monthly option-adjusted spreads for nine
corporate bond indexes from Merrill Lynch from January 1997 to July
2002. We find that the Russell 2000 index historical return volatility
and the Conference Board composite leading and coincident economic
indicators have significant power in explaining credit spread changes,
especially for high yield indexes. 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 the 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. |
| URI: | http://hdl.handle.net/2451/27150 |
| Appears in Collections: | Finance Working Papers
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