An empirical analysis of the relationship of bond yield spreads and macro economic factors

Abstract

This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industrial production), the opposite is true for utilities.

The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market

“…Instead of analysing monetary policy as a potential determinant of corporate bond spreads, these studies show various other determinants: the inflation rate, the business cycle, the yield curve slope, interest rate volatility, equity market risk, the difference between volumes of corporate and treasury bond issuance and liquidity considerations (Dialynas and Edington, 1992;Athanassakos and Carayannopoulos, 2001;Elton et al, 2001;Hattori et al, 2001). 2 Other studies argue that the corporate bond market is a segmented market driven by supply or demandspecific factors and not by macroeconomic and financial variables (Collin-Dufresne et al, 1999) or that United States high-yield spreads are driven by firm-specific events (Cooper et al, 2001).…”

The impact of bank entry in the Japanese corporate bond underwriting market

“…Since increased business activity is likely to boost investor confidence and reduce the riskiness of corporate bonds, it is expected that c 13 < 0. When the inflation rate rises, investors are likely to require a higher risk premium to hold corporate bonds, so that it is expected that c 14 < 0 (see Athanassakos and Carayannopoulos (2001) for a more detailed discussion of both these effects).…”

How Important is Sovereign Risk in Determining Corporate Default Premia? the Case of South Africa

“…39 Most South African companies have only one or two bonds outstanding. 40 Athanassakos and Carayannopoulos (2001) suggest a procedure to construct the equivalent risk-free bonds using the coupon strips of U.S. treasury bonds (the risk-free bonds in their study). The problem with this procedure is that while our corporate bonds are of rather medium-term maturity, the risk-free zerocoupon bonds available to us (see next section) are only of very long maturities (2017 to 2029), so that it would be impossible to estimate the shorter end of the yield curves with any degree of accuracy.…”