Oil prices and corporate high-yield spreads: Evidence from panels of nonenergy and energy European firms

Abstract

This paper explores the potential impacts of oil prices on high-yield corporate bond spreads for the case of European nonenergy and energy corporate samples from 14 countries and spans the period from 2000–2016. The findings document the presence of a positive link between oil prices and the high-yield spreads in the case of nonenergy firms and a negative link between oil prices and the high-yield spreads in the case of energy firms. Moreover, the analysis investigates the potential asymmetries in the above association for the case of nonenergy firms prior to and after July 2014, a month that signified the beginning of a serious oil price plunge. The new results illustrate that the effects of oil prices on high-yield spreads in the case of nonenergy firms are nonlinear, with the effects in the pre-July 2014 regime being statistically insignificant. Meanwhile, in the post-July 2014 regime, oil prices exert positive and statistically significant effects on yield spreads. In other words, although the plunge in oil prices was considered to result in a substantial decline in the operational costs for nonenergy firms, it made investors more risk averse due to the lower asset prices and thus increased the yield spreads for these firms.