FIN-03-013 |
NYU Stern School of Business |
March 2003
Jing-zhi Huang and Weipeng Kong
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.
Jing-zhi Huang
Institution: Stern School of Business, New York University, 44 West 4th Seet,
New York, NY 10012
Telephone: (212) 998-0300
Fax: (212) 995-4233
Email: jhuang0@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~jhuang0
Weipeng Kong
Institution: Smeal College of Business, Pennsylvania State University, University
Park, PA 16802
Telephone: (814) 865-0618
Email: wxk140@psu.edu
To download a copy of this paper click here
To request a copy of this paper click here
|