A macro–financial analysis of the corporate bond market

Abstract

We assess the contribution of economic and financial factors in the determination of euro area corporate bond spreads over the period 2001–2015. The proposed multi-market, no-arbitrage affine term structure model is based on the methodology proposed by Dewachter et al. (J Bank Finance 50:308–325, 2015). We model jointly the ‘risk-free curve’, measured by overnight index swap (OIS) rates, and the corporate yield curves for two rating classes (A and BBB). The model includes four spanned and six unspanned factors. We find that, in general, both economic (real activity and inflation) and financial factors (proxying risk aversion, flight to liquidity and general financial market stress) play a significant role in the determination of the spanned factors and hence in the dynamics of the risk-free yield curve and corporate bond spreads. Across the risk-free OIS curve, macroeconomic and financial factors are each responsible on average for explaining 30 and 65% of yield variation, respectively. For A- and BBB-rated corporate debt, the selected financial variables explain on average 50% of the variation in corporate spreads during the last decade.