Determinants Of Bond Yield Spreads Research Articles

Yield Spread Determinants & Reaction to Negative Event-shocks and Downgrades: The Case of Greece

The purpose of my study is to investigate the significance in the determination and worseness of ten year government bond yields spreads as well as the variation in the level of these spreads, factors like political risk and sovereign downgrades, considered as political and economic negative shocks in Greek economy during financial and public sector’s debt crisis. By extension to the main research, it is examined if shocks affected yields of two key sub-indexes of Athens Stock Exchange, ATHEX/FTSE large cap and ATHEX/Banks. The study extends from 1/1/2008 to 8/28/2015. My study is conducted in two stages, with similar goals. In this paper, I firstly investigate the role of significant, negatively signed political and economic events as well as sovereign downgrades, concerning Greece, in the determination of Greek ten-year bond spreads. In addition to the main research, I examine the influence of these negative shock-events in the yields of ATHEX/FTSE large cap index and ATHEX/Banks index. For this purpose, I make a series of regressions, since most studies analyzing the determinants of bond yield spreads rely on simple linear regression models and use OLS method of regression, as well. Secondly, I make an event-study, in Excel, on cumulative yields of the two latter indexes and on the yields of Greek bonds’ spreads and their movements ten days before and ten days after events and credit ratings that took place throughout the sample period. For the needs of the study, I reassess all models as well as the event study for three sub-time periods, namely “pre-crisis” period, from 1/1/2008 to 5/5/2010, “mid-crisis” period, from 5/6/2010 to 12/16/2014 and “new-crisis” period, from 12/17/2014 to 8/28/2015. Overall, the results that gave this empirical analysis seem to be very useful for politicians, for market makers and for market participants. It is mentioned that the evidence and conclusions occurred in the first part of this empirical analysis are confirmed, since they are in agreement with the findings of the event study that is in the second part of my research. Concluding, Greek government bond yield spreads are influenced from shock events and downgrades, mainly, during new crisis and pre-crisis period, respectively. Throughout the mid-crisis period neither yields of Athens stock Exchange indexes nor negatively signed shock events, including ratings, could cause a significant movement in spreads. This maybe means that, during this period, only other risk, fundamental or macroeconomic parameters could affect spreads. Especially from results of event study occurs the exact way that bond yield spreads and the yields of ATHEX/FTSE large cap and ATHEX/Banks indexes reacted ten days before and since an event-shock happened. The observed significant movements of spreads and the abnormal yields of indexes before the shock maybe indicates a leakage of information or a good prediction ability of market, while the noticed abnormal movements of spreads and yields after the event-day reflect the way of investors’ reaction in shocks.

CEO ability heterogeneity, board’s recruiting ability and credit risk

This study investigates the effects of the CEO (Chief Executive Officer) ability heterogeneity of an industry and the board’s recruiting capability on firm credit risk by using 26,235 America bond data from the year 2001 to 2014. We find that both CEO ability heterogeneity and board’s recruiting ability enhance a firm’s credit quality when controlling for other well-known determinants of bond yield spreads, implying that high CEO ability heterogeneity and good board’s recruiting ability both encourage a firm to replace the underperformed CEO earlier and improve the firm’s subsequent performance, which enhances firm value and credit quality (Merton in J Finance 29(2):449–470, 1974). We also find that good macroeconomic conditions weaken the effect of CEO ability heterogeneity on bond yield spreads while enhance that of board’s recruiting ability. Moreover, board’s recruiting ability weakens the effect of CEO ability heterogeneity on bond yield spreads, indicating that there may exist a trade-off relationship between the CEO ability heterogeneity effect and the board’s recruiting ability effect. Finally, the results are robust when considering endogeneity issues and other measures of CEO ability heterogeneity.

Determinants of Bond Yield Spread Changes in South Africa

This paper offers an emerging market perspective on the determinants of bond yield spread changes. The study covers the period 2005-2013 and it is based on a sample of 106 corporate vanilla bonds listed on the South African market. To capture the impact of the financial crisis of 2007-2008, the sample period is split into three sub periods, the pre-financial crisis (2005-2006), mid-financial crisis (2007-2009) and post financial crisis (2010-2013). The study shows that changes in equity volatility, interest rate level and the yield curve slope are significant determinants of bond yield spreads. The impact of equity volatility and interest rate level is more pronounced during the mid-financial crisis period. Controlling for credit ratings and bond convexity does not alter the findings. The study confirms the results documented in developed countries, it highlights the key determinants of bond values and returns of active bond trading strategies. For policy makers, the findings of this study call for the need to introduce further measures and reforms to address liquidity challenges on the bond market and volatility induced by non-resident investors on the bond market.

Analyzing determinants of bond yield spreads with Bayesian Model Averaging

This paper analyzes determinants of country default risk in emerging markets, reflected by sovereign yield spreads. The results reported so far in the literature are heterogeneous with respect to significant explanatory variables. This could indicate a high degree of uncertainty about the “true” regression model. We use Bayesian Model Averaging as the model selection method in order to find the variables which are most likely to determine credit risk. We document that total debt, history of recent default, currency depreciation, and growth rate of foreign currency reserves as well as market sentiments are the key drivers of yield spreads.

Emerging market yield spreads: Domestic, external determinants, and volatility spillovers

This study examines the determinants of bond yield spreads for 22 emerging markets in the period 1998–2009. Several determinants are considered. In addition, I consider the connection between volatility and bond yield spreads. Volatility and central bank transparency are two factors common to all countries examined whereas clear idiosyncrasies are found according to whether emerging markets are in Latin and South America, Europe, Asia or Africa. Most notably, the global financial crisis raised yield spreads, except in Asia, which suggests that, in a sense, bond markets in that region were decoupled from those in other parts of the world.

Emerging Market Yield Spreads: Domestic, External Determinants, and Volatility Spillovers

This study examines the determinants of bond yield spreads for 22 emerging markets in the period 1998-2009. Several determinants are considered. In addition, I consider the connection between volatility and bond yield spreads. Volatility and central bank transparency are two factors common to all countries examined whereas clear idiosyncrasies are found according to whether emerging markets are in Latin and South America, Europe, Asia or Africa. Most notably, the global financial crisis raised yield spreads, except in Asia, which suggests that, in a sense, bond markets in that region were decoupled from those in other parts of the world.

Financial Contracting and the Choice Between Private Placement and Publicly Offered Bonds

Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to minimize both the financing costs and the transaction costs.

Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds

Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to minimize both the financing costs and the transaction costs.

An Empirical Examination of the Determinants of Bond Yield Spreads

The yield on corporate bonds of good credit quality (issued by either industrial firms or public utilities) invariably is greater than the yield on U.S. government bonds of similar term and taxability. Furthermore, the yield on industrial bonds differs systematically from that of utility bonds of equal credit rating, term, and tax status. Each of these yield spreads is volatile. For example, the industrial-utility spread rose from a few basis points in 1973 to more than one full percentage point in 1975. The primary purpose of this paper is to examine the reasons for the existence and fluctuation of these yield differentials.