Credit Spreads, Business Conditions, and Expected Corporate Bond Returns

Lin, Hai; Tao, Xinyuan; Wang, Junbo; Wu, Chunchi

doi:10.3390/jrfm13020020

Cited by 3 publications

(3 citation statements)

References 40 publications

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“…We also help add to a burgeoning literature that focuses on the pricing of corporate bonds (Bai et al 2019;Goldberg and Nozawa 2021;Goldstein et al 2019;Lin et al 2020;Yin et al 2018), and on the effects of corporate events on bondholders (Fang-Klingler 2019), or on the joint reaction of all stakeholders (Back and Crotty 2014;Kapadia and Pu 2012). This literature has expanded following the advent of the TRACE bond price reporting system that began in 2004 and the seminal papers by Bessembinder et al (2006) and Bessembinder et al (2009) which described the best ways to make use of the new data.…”

Section: Other Relevant Literaturementioning

confidence: 95%

The Effect of Industry Restructuring on Peer Firms

Holcomb

Mason

2021

JRFM

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We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit.

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Section: Other Relevant Literaturementioning

confidence: 95%

The Effect of Industry Restructuring on Peer Firms

Holcomb

Mason

2021

JRFM

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“…This difference is frequently referred to as the "credit spread". Lin et al (2020) highlights that the credit spread index and its components have more predictive power for bond returns than conventional default and term spreads. Researchers are lately interested in incorporating environmental and social issues into the assessment of credit risk.…”

Section: Introductionmentioning

confidence: 99%

Credit Risk in G20 Nations: A Comparative Analysis in International Finance Using Option-Adjusted-Spreads

Boliari¹,

Topyan²

2022

JRFM

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Corporate bond yields are the manifestation of the cost of financing for private firms, and if properly evaluated, they provide researchers with valuable risk information. Within this context, this work is the first study producing corporate yield spreads for all S&P-rated bonds of G20 nations to explain their comparative riskiness. The option-adjusted spread analysis is an advanced method that enables us to compare the bonds with embedded options and different cash flow characteristics. For securities with embedded options, the volatility in the interest rates plays a role in ascertaining whether the option is going to be invoked or not. Therefore, researchers need a spread that, when added to all the forward rates on the tree, will make the theoretical value equal to the market price. The spread that satisfies this condition is called the option-adjusted spread, since it considers the option embedded into the issue. Ultimately, this work investigates the credit risk differentials of S&P rated outstanding bonds issued by the G20 nations to provide international finance professionals with option-adjusted corporate yield spreads showing the credit risk attributable to debt instruments. Detailed results computed using OAS methodology are presented in tables and used to answer the six vital credit-risk-related questions introduced in the introduction.

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“…This special issue of the Journal of Risk and Financial Management on Corporate Debt includes six interesting papers that help address these questions. Lin et al (2020) studies the credit spread index proposed by Gilchrist and Zakrajsek (2012) (GZ), and shows that it has substantial predictive power for corporate bond returns. They also show that the GZ index has more predictive power than traditional default spread and term structure variables.…”

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confidence: 99%