Corporate Bond Credit Spreads Research Articles

Economic policy uncertainty and volatility of corporate bond credit spread: Evidence from China and the United States

In the prevailing situation of economic instability, it is customary for governments to enact economic policies aimed at influencing the decision-making processes of corporations. Nevertheless, the uncertainty surrounding economic policies inevitably impacts the capital structure of firms, consequently giving rise to fluctuations in corporate bond credit spreads through various transmission channels. Therefore, this study examines the impact of economic policy uncertainty (EPU) on the volatility of corporate bond credit spread in China and the United States (U.S.) from January 2014 to July 2021. Developing a one-sided filtering single-factor and multi-factor GARCH-MIDAS model in which monthly EPU and daily corporate bond credit spread are used as variables with different frequencies, the total volatility of corporate bond credit spread is decomposed into long- and short-term volatility components. Utilising the EPU data, encompassing indices delineating EPU in the U.S. (Baker et al., 2016) and China (Huang and Luk, 2020), alongside the corporate bond credit spreads in both the Chinese and American markets, we find that the level and volatility of EPU positively impact the long-term volatility of corporate bond credit spread with different ratings. Moreover, the EPU level contributes to more than 12% to the total volatility of corporate bond credit spread in the Chinese samples and more than 4.31% in the U.S. samples. While the variance of EPU contributes to over 5.19% to the total volatility of corporate bond credit spread in the U.S. samples, which is more than that of the Chinese samples.

Sustainability and credit spreads in Japan

Does the market value the environmental, social, and governance (ESG) performance of firms in corporate bond credit spreads? In this study, we construct the firm-level corporate bond credit spread based on the ‘bottom-up’ approach and examine the relationship between corporate ESG performance and credit spreads. Our results indicate that the ESG performance significantly decreases the credit spreads and the effects of ESG performance increase with the recognition of the importance of ESG investing regardless of the pillar. Furthermore, our analysis suggests differential trends across the issuing firms’ credit quality. Specifically, the ESG performance has a much higher impact on the credit spreads for lowly-rated firms, implying that the information on higher ESG scores could be a stronger signal for higher sustainability for those firms that are considered to have higher default risk from the financial information. Within the E, S, and G pillars, the resource use category, human rights category, and management category respectively show the most prominent annual lowering effects.

Insider selling and credit spread of corporate bonds

This paper investigates the impact of insider selling on credit spreads in the secondary market of corporate bonds. The data of listed corporate bonds with insider sale events from 2012 to 2021 are selected as the research sample. It is found that the greater the intensity of insider's holdings sale, the greater the credit spreads of corporate bonds in the secondary market; the mechanism test reveals that the more serious the company's unpredicted performance decline, the more pronounced the positive impact of insider's holdings sale on credit spreads; when analysts' attention increases, it correspondingly weakened the positive impact of insider's holdings sale on the credit spreads of corporate bonds.

Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality

ABSTRACTThe response of corporate bond credit spreads to three exogenous macro shocks—oil supply, investment‐specific technology, and government spending—is large, significant, and a mirror image of macroeconomic activity. This countercyclicality is driven largely by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy.

Corporate strategy aggressiveness and bond credit spreads

This paper investigates the impact of corporate strategy on corporate bond credit spreads and the mechanism of action, using corporate bonds issued by A-share companies during 2004–2021 as the research sample for empirical analysis. It is found that the degree of aggressiveness of corporate strategy has a significant positive impact on bond credit spreads; corporate firms with aggressive strategies take higher levels of risk and have greater credit risk, thus making bond credit spreads more extensive; the improvement of accounting information quality can significantly mitigate the impact of aggressive strategies on credit spreads.

A comparative study of firm value models: Default risk of corporate bonds

This paper presents a regime-switching normal tempered stable (NTS) firm value model for pricing default risk, based on an N-state continuous Markov chain process and an underlying NTS process. The derived regime switching characteristic function enables closed-form expressions for corporate bond credit spreads, with the model’s innovation arising from substituting the characteristic function of the existing NTS firm value model. This approach is assumed to capture hidden factors affecting default risk pricing. Calibration for the term structure of US corporate industrial credit spread demonstrates the model’s superior fit across all credit ratings compared to NTS and Merton firm value models.

A new take on the relationship between interest rates and credit spreads

ABSTRACT We revisit the link between interest rates and corporate bond credit spreads by applying Rigobon’s (2003) unique heteroskedasticity-based identification methodology to their interconnected dynamics through a bivariate VAR system. This different approach allows us to account for simultaneity issues and use this framework to test the various possible explanations for the credit spread – interest rate relation that have been proposed by the literature over the years. We find that credit spreads do indeed respond negatively to interest rates, a result consistent with Merton’s (1974) structural model. This negative relation is robust to macroeconomic shocks, market uncertainty, business cycles, different sample periods, bond callability, and bond ratings. We also find the magnitude of the negative relation to be larger for high-yield bonds than for investment-grade bonds, and are able to rule out the option-like feature of callable bonds proposed by Duffee (1998) as the main driver of the negative nature of the relationship. These results have important portfolio and risk management implications.

Deconstructing the Impact of ESG Ratings on Us Corporate Bond Credit Spreads: Evidence of Information Channeling?

Deconstructing the Impact of ESG Ratings on Us Corporate Bond Credit Spreads: Evidence of Information Channeling?

The Long-term Interest Rate and Corporate Bond Credit Spreads

The Long-term Interest Rate and Corporate Bond Credit Spreads

Investigating the determinants of corporate bond credit spreads in the euro area

Investigating the determinants of corporate bond credit spreads in the euro area

The intra-regional spillover effects of bond defaults: Evidence from the Chinese corporate debt market

Taking the first bond defaults in each province in China as credit events, we adopt a staggered difference-in-difference model and find that credit spreads of other corporate bonds in the same province increase by 15 basis points, suggesting spillover effects. The spillover effects are stronger on local state-owned enterprises (LSOEs) and non-state-owned enterprises (Non-SOEs) than on central state-owned enterprises (CSOEs). Moreover, the defaults of LSOEs trigger the greatest spillover effects among all types of defaults. Provinces with higher guarantee capability experience fewer spillover effects. Our findings suggest intra-regional spillover effects from investors' shaken beliefs on implicit government guarantees.

Economic Policy Uncertainty, Credit Rating Inflation and Credit Spread

Utilizing data of corporate bonds issued by Chinese companies in Shanghai and Shenzhen Stock Exchanges, this paper examines the impact and mechanism of China's economic policy uncertainty on corporate bond credit spreads. The research finds: (1) Generally speaking, the increase of economic policy uncertainty will lead to larger credit spreads. (2) The impact of economic policy uncertainty on credit spreads will have an asymmetric effect due to factors such as property rights, corporate size and equity concentration. (3) Credit rating inflation plays a certain mediating effect in the influence of economic policy uncertainty on credit spreads. Government should pay more attention to the policy consistency and coherence, strengthen the information exchange and communication with enterprises, improve the bond pricing system and broaden the financing channels of small and medium-sized enterprises.

Stocks versus corporate bonds: A cross-sectional puzzle

We study the cross-sectional relation between stock and corporate bond markets. By correcting credit spreads of corporate bonds for expected default losses and by using equity-bond elasticities, we obtain a firm’s expected bond-implied stock return, which we then compare to its realized stock return. We find, surprisingly, a strong negative cross-sectional relation between these expected and realized stock returns. We show that this effect is not simply a restatement of the distress risk puzzle or other well-known anomalies in stock and corporate bond markets. This negative cross-sectional relation is strongest for high-risk firms and for liquid stocks.

The impact of analysts’ attention and research reports’ attention on corporate bond credit spreads in China

As an important information intermediary and external monitor, analysts have a serious impact on investors. In order to study the impact of analysts’ attention and research reports’ attention on corporate bond credit spreads, this paper selects non-financial companies issuing bonds in China A-share market from 2017 to 2020 as samples, establish a panel data regression model for empirical research. The research found that both analyst attention and research report attention have a significant impact on the credit spread of corporate bonds, and the higher the analyst attention and research report attention, the smaller the corporate bond credit spread, indicating that analysts play an effective role in supervising the default risk of listed companies. The research in this article expands the research on analysts’ attention and research reports’ attention, and the research on the factors affecting bond credit spreads.

The credit spread curve distribution and economic fluctuations in Japan

Predicting the future economy is of great interest to practitioners and policymakers. In this study, we confront this problem by examining the relationship between credit spread curves and future economic activity. To this end, we construct a monthly empirical distribution of credit spread curves by calculating credit spreads of corporate bonds at the firm level in Japan and examine whether it can be used to predict a Japanese business cycle. We find that the credit spread curve information in higher deciles (implying lower credit quality) provides more predictive power for the future economy than the information of government bond yield curve or the credit spread index suggested by previous studies. In addition, the smooth-transition predictive regression analysis demonstrates that credit spread curves have more predictive power under the low uncertainty regime, and depict a significant predictive power for a short horizon for both regimes. Finally, our component-wise analysis shows that the credit spread curve information has robust predictive power for producer-side indicators under the low uncertainty regime and for labor market conditions, regardless of the regime.

Conditional Inferences Based on Vine Copulas with Applications to Credit Spread Data of Corporate Bonds

Abstract Understanding the dependence relationship of credit spreads of corporate bonds is important for risk management. Vine copula models with tail dependence are used to analyze a credit spread dataset of Chinese corporate bonds, understand the dependence among different sectors, and perform conditional inferences. It is shown how the effect of tail dependence affects risk transfer, or the conditional distributions given one variable is extreme. Vine copula models also provide more accurate cross prediction results compared with linear regressions. These conditional inference techniques are a statistical contribution for analysis of bond credit spreads of investment portfolios consisting of corporate bonds from various sectors.

Does ESG Disclosure Affect Corporate-Bond Credit Spreads? Evidence from China

With the exponential development of an ecological and sustainable economy and society, the concept and practice of environmental, social, and governance (ESG) investments are being popularized in the capital market of China. ESG disclosure is an important supplement to financial disclosure and plays an increasingly significant role in asset pricing. In this paper, we selected corporate bond data in China’s secondary bond market from 2015 to 2020, and introduced the Nelson–Siegel model to study the influence of ESG disclosure on corporate bond credit spreads in the secondary market. This model passed robustness tests when we used alternative data fitted by the modified Nelson–Siegel model. Results show that ESG disclosure significantly reduces credit spreads on corporate bonds in the secondary market. State ownership and industry play significant roles in moderating the impact of ESG disclosure on corporate bond credit spreads. Specifically, the ESG disclosure of non-state-owned companies and companies in non-high-pollution and -energy-consumption industries has a greater impact on reducing corporate bond credit spreads. Therefore, we urge regulatory departments to establish a sound ESG disclosure evaluation system, and the issue companies to improve the quality of their ESG disclosure, especially non-state-owned companies, and those in non-high-pollution and -energy-consumption industries. Corporate bond investors would benefit from integrating ESG information into their investment decision-making process.

Dealer Inventory Constraints in the Corporate Bond Market during the COVID Crisis

Beginning in late February 2020, market liquidity for corporate bonds dried up and corporate bond credit spreads soared amid broad financial market dislocations related to the COVID-19 pandemic. The causes of this liquidity dry-up and the spike in corporate bond spreads remain subjects of debate.

Can Trustees Be Trusted? Relation Between Corporate Bond Trustees and Credit Spreads

ABSTRACT To protect the interest of the investors, the corporate bond market in China has implemented a trustee system. However, before the first bond default happened in 2014, implicit government guarantee for the issuers ensured a market with zero default. In recent years, the rising amount of corporate bond defaults has ignited concerns about the credit risk and brings China’s underdeveloped trustee system to authorities’ attention. Based on the textual content of the trustee reports from 2013 to 2018, this paper examines the association between the textual content of trustee reports and the credit spreads. Results show that the extent of risk disclosure in trustee reports is positively correlated with the credit spreads. Furthermore, a higher positivity of the trustee reports is associated with lower credit spreads. These results reveal the monitoring and informational role of the trustees in China. Also, incremental explanatory power of the trustees lends support for improving corporate bond risk management.

Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

This study extracts the common factors from firm-based credit spreads of major Japanese corporate bonds and examines the predictive content of the credit spread on the real economy. Instead of employing single-maturity corporate bond spreads, we focus on the entire term structure of the credit spread to predict the business cycle. We extend the dynamic Nelson-Siegel model to allow for both common and firm-specific factors. The results show that the estimated common factors are important drivers of individual credit spreads and have substantial predictive power for future Japanese economic activity. This study contributes to the literature by examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.