Castagnetti, Carolina and Rossi, Eduardo (2008): Euro corporate bonds risk factors.
Download (378kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Euro corporate bonds risk factors|
|Keywords:||Euro Corporate Bonds; Cross Section Dependence; Common Correlated Effects; Yield Curve|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G10 - General|
|Depositing User:||carolina castagnetti|
|Date Deposited:||20. Feb 2009 15:40|
|Last Modified:||11. Feb 2013 16:45|
Annaert, J., and M. D. Ceuster (2000): Modelling European Credit Spreads,Discussion paper, Deloitte & Touche.
Avramov, D., G. Jostova, and A. Philipov (2007): Understanding Changes in Corporate Credit Spreads,Financial Analyst Journal, 63(2), 90-105.
Bai, J. (2003): Inferential Theory for Factor Models of Large Dimensions, Econometrica, 71(1), 135-171.
Bai, J. (2006): Panel Data Models with Interactive Fixed Effects, Mimeo
Bai, J., and S. Ng (2002): Determining the Number of Factors in Approximate Factor Models, Econometrica, 70(1), 191-221.
Biais, B., F. Declerck, J. Dow, R. Portes, and E. von Thadden (2006): European Corporate Bond Markets: Transparency, Liquidity, E±ciency, Discussion paper, Center for Economic Policy Research.
Black, F., and J. Cox (1976): Valuing Corporate Securities: Some Effects of Bond Indenture Provisions, Journal of Finance, 31(2), 351-367.
Black, F., and M. Scholes (1973): The Pricing of Options and Corporate Liabilities, The Journal of Political Economy, 81, 637-654.
Briys, E., and F. De-Varenne (1997): Valuing Risky Fixed Rate Debt: An Extension, Journal of Financial and Quantitative Analysis, 32(2), 239-248.
Campbell, J., and G. Taksler (2003): Equity volatility and Corporate Bond Yields, The Journal of Finance, 58(6), 2321-2349.
Coakley, J., A. Fuertes, and R. Smith (2002): A Principal Component Approach to Cross-Section Dependence in Panels, Discussion paper, Birkbeck College.
Coakley, J., A. Fuertes, and R. Smith(2006): Unobserved Heterogeneity in Panel Time Series Models, Computational Statistics and Data Analysis, 50(9), 2361-2380.
Collin-Dufresne, P., and R. Goldstein (2001): Do Credit Spreads Reflect Stationary Leverage Ratios?, Journal of Finance, 56(5), 1929-1957.
Collin-Dufresne, P., R. Goldstein, and J. Martin (2001): The Determinants of Credit Spread Changes, The Journal of Finance, 56(6), 2177-2207.
de Jong, F., and J. Driessen (2005): Liquidity Risk Premia in Corporate Bond Markets, mimeo.
Duffee, G. (1998): The Relation between Treasury Yields and Corporate Bond Yield Spreads, The Journal of Finance, 53(6), 2225-2241.
Duffee, G.(1999): Estimating the Price of Default Risk,Review of Financial Studies, 12(1), 197-226.
Duffie, D., and K. Singleton (2003): Credit Risk: Pricing, Measurement, and Management. Princenton University Press, Princenton.
Ederington, L., J. Yawitz, and B. Roberts (1987): The Informational Content of Bond Rating, Journal of Financial Research, 10(3), 211-226.
Elton, E., M. Gruber, D. Agrawal, and C. Mann (2001): Explaining the Rate Spread on Corporate Bonds, The Journal of Finance, 56(1), 241-71.
Eom, Y., J. Helwege, and J. Huang (2003): Structural Models of Corporate Bond Pricing: an Empirical Analysis, Review of Financial Studies, 17(2), 499-544.
Geske, R. (1977): The Valuation of Corporate Liabilities as Compound Options, Journal of Financial and Quantitative Analysis, 12(4), 541-552.
Hong, G., and A. Warga (2000): An Empirical Study of Bond Market Transactions,Financial Analysts Journal, 56(2), 32-46.
Houweling, P., A. Mentink, and T. Vorst (2005): Comparing Possible Proxies of Corporate Bond Liquidity, Journal of Banking and Finance, 29(6), 1331-1358.
Hsiao, C., and M. Pesaran (2008): Random Coefficient Models, in The Econometrics of Panel Data (Third Edition), ed. by L. Matyas, and P. Sevestre. Kluwer, Academic publishers.
Kapetanios, G., and M. Pesaran (2007): Alternative Approaches to Estimation and Inference in Large Multifactor Panels: Small Sample Results with an Application to Modelling of Asset Returns, in The Refinement of Econometric Estimation and Test Procedures: Finite Sample and Asymptotic Analysis, ed. by G. Phillips, and E. Tzavalis. Cambridge University Press, Cambridge.
Kwan, S. (1996): Firm-Specific Information and the Correlation between Individual Stocks and Bonds, Journal of Financial Economics, 40(1), 63-80.
Lando, D. (2004): Credit Risk Modeling. Princenton University Press, Princenton.
Leland, H. (1994): Corporate Debt Value, Bond Covenants, and Optimal Capital Structure, Journal of Finance, 49(4), 1213-1252.
Leland, H., and K. Toft (1996): Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads, Journal of Finance, 51, 987-1019.
Longstaff, F., and E. Schwartz (1995): A Simple Approach to Valuing Risky Fixed and Floating Rate Debt, The Journal of Finance, 50, 789-819.
Merton, R. (1974): On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, The Journal of Finance, 29, 449-70.
Pesaran M. (2004): General Diagnostic Tests for Cross Section Dependence in Panels, mimeo.
Pesaran M. (2006): Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure, Econometrica, 74(4), 967-1012.
Pesaran, M., and R. Smith (1995): Estimating Long-Run Relationships from Dynamic Heterogeneous Panels, Journal of Econometrics, 68(1), 79-113.
Pesaran, M., and T. Yamagata (2007): Testing Slope Homogeneity In Large Panels, Journal of Econometrics, forthcoming.
Shiller, R. (1979): The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure, Journal of Political Economy, 87, 1190-1219.
Swamy, P. (1970): Efficient Inference in Random Coefficient Regression Model, Econometrica, 38, 311-323.
Turnbull, S. (1979): Debt Capacity, Journal of Finance, 34(4), 931-940.
Van-Landschoot, A. (2003): The term structure of credit spreads on euro corporate bonds, Discussion paper, Tilburg University, Center for Economic Research.