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Commonality In Credit Spread Changes
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Book Synopsis Commonality in Credit Spread Changes by : Zhiguo He
Download or read book Commonality in Credit Spread Changes written by Zhiguo He and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two intermediary-based factors - a broad financial distress measure and a dealer corporate bond inventory measure - explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural factors. A simple model, in which intermediaries facing margin constraints absorb supply of assets from customers, accounts for the documented explanatory power and delivers further implications with empirical support.
Book Synopsis Understanding Changes in Corporate Credit Spreads by : Doron Avramov
Download or read book Understanding Changes in Corporate Credit Spreads written by Doron Avramov and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: New evidence is reported on the empirical success of structural models in explaining changes in corporate credit risk. A parsimonious set of common factors and company-level fundamentals, inspired by structural models, was found to explain more than 54 percent (67 percent) of the variation in credit-spread changes for medium-grade (low-grade) bonds. No dominant latent factor was present in the unexplained variation. Although this set of factors had lower explanatory power among high-grade bonds, it did capture most of the systematic variation in credit-spread changes in that category. It also subsumed the explanatory power of the Fama and French factors among all grade classes.
Book Synopsis Explaining Credit Spread Changes by : Jing-Zhi Huang
Download or read book Explaining Credit Spread Changes written by Jing-Zhi Huang and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the question of the determinants of corporate bond credit spreads using both weekly and monthly option-adjusted spreads for nine corporate bond indices from Merrill Lynch from January 1997 to July 2002. We find that the Russell 2000 index historical return volatility and Conference Board composite leading and coincident economic indicators have significant power in explaining credit spread changes, especially for high yield indices. Furthermore, these three variables plus the interest rate level, the historical interest rate volatility, the yield curve slope, the Russell 2000 index return, and the Fama-French [1996] high-minus-low factor can explain more than 40% of credit spread changes for five bond indexes. In particular, these eight variables can explain 67.68% and 60.82% of credit spread changes for the B- and BB rated indexes, respectively. Our analysis confirms that credit spread changes for high-yield bonds are more closely related to equity market factors and also provides evidence in favor of incorporating macroeconomic factors into credit risk models.
Book Synopsis The Determinants of Credit Spread Changes by : Pierre Collin-Dufresne
Download or read book The Determinants of Credit Spread Changes written by Pierre Collin-Dufresne and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using straight industrial bonds with quoted prices, we investigate the determinants of credit spread changes. We find the variables that should in theory determine credit spread changes in fact have limited explanatory power. Further, the residuals from this first-pass regression are highly cross-correlated, and principal components analysis strongly suggests they are driven by a single common factor. We investigate several macro-economic and financial variables as candidate proxies for this factor. We cannot, however, find any set of variables which explain this common systematic factor. Our results suggest the corporate bond market is a segmented market driven by corporate bond specific supply/demand shocks.
Book Synopsis The Determinants of Credit Spread Changes by : Pierre Collin Dufresne
Download or read book The Determinants of Credit Spread Changes written by Pierre Collin Dufresne and published by . This book was released on 1999 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Determinants of OTC U.S. Corporate Bonds' Credit Spread Changes by : Bo Wang
Download or read book The Determinants of OTC U.S. Corporate Bonds' Credit Spread Changes written by Bo Wang and published by . This book was released on 2014 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on the structural model, macroeconomic and liquidity factors are tested against credit spread changes in American OTC corporate bonds. I discovered that the volatility of long run Treasury yield has even greater explanatory power than the yield itself. Macroeconomic indicators, such as Wilshire 5000 Total Market Index, have significant explanatory power over credit spread changes while there is only weak evidence that a common liquidity factor is missing from the model.
Book Synopsis Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities by : Christopher Hessel
Download or read book Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities written by Christopher Hessel and published by . This book was released on 2006 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the change of the credit spread volatility from 1993 to 2001. We find that credit spreads between junk grade corporate bonds and Treasury bond are significantly more volatile in the second half of this period when credit related securities become popular. However credit spreads between investment-grade corporate debt and Treasury are not significantly more volatile. For the period prior to the introduction of credit related securities, credit spread changes followed mean reverting processes. In the period with rapid growth of these new products, the credit spread changes shifted toward random walk processes. The loss of the mean reverting process with the advent of the new securities is consistent with increased market efficiency.
Book Synopsis Credit spread changes within switching regimes by :
Download or read book Credit spread changes within switching regimes written by and published by . This book was released on 2009 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis What Drives the Commonality Between Credit Default Swap Spread Changes? by : Mike Anderson
Download or read book What Drives the Commonality Between Credit Default Swap Spread Changes? written by Mike Anderson and published by . This book was released on 2016 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper documents an increase in the correlations between credit default swap (CDS) spread changes during the 2007-2009 crisis and investigates the source of that increase. One possible explanation is that correlations increased because fundamental values became more correlated. However, I find that changes in fundamentals account for only 20% of the increase in correlations. The remaining increase is attributed to changes in the market price of default risk, as evidenced by an increase in the volatility of the default risk premium. Additionally, I find that changes in liquidity risk increased correlations whereas changes in counterparty risk did not.
Book Synopsis Credit Spread Changes Within Switching Regimes by :
Download or read book Credit Spread Changes Within Switching Regimes written by and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Bond Market Turnover and Credit Spread Changes by : Viorel Roscovan
Download or read book Bond Market Turnover and Credit Spread Changes written by Viorel Roscovan and published by . This book was released on 2013 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent research on default risk has shown that most of the variation in credit spreads is driven by a common yet unidentifiable factor. I find that bond turnover explains up to 11% of this variation. Using the implications of an intertemporal capital asset pricing model, I construct a bond hedging portfolio from TRACE transactions data and relate its return to changes in credit spreads. In theory, this portfolio captures the dynamic risk of the economy and, hence, hedges the risk of changes in market conditions. My findings are as follows. First, credit spreads relate asymmetrically to the return on the bond hedging portfolio. When market conditions are risky, the return on the bond hedging portfolio is positive and credit spreads increase significantly. During unchanged or less risky market conditions, the return on the bond hedging portfolio is small or negative, and credit spreads are less sensitive. Second, on average, credit spreads do not relate to a similar hedging portfolio constructed from equity volume data. The return on the stock hedging portfolio, however, captures some variation in credit spreads for riskier bond classes. Third, in contrast to the results for equity markets, where stock returns and volume are weakly related, this paper finds a strong link between volume and credit spreads in corporate bond markets.
Book Synopsis Understanding Common Factors in Domestic and International Bond Spreads by : Rodolfo Martell
Download or read book Understanding Common Factors in Domestic and International Bond Spreads written by Rodolfo Martell and published by . This book was released on 2005 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, I study the determinants of credit spread changes of individual U.S. dollar denominated bonds - domestic and foreign sovereign - using fundamentals specified by structural models. Credit spreads are important determinants of the cost of debt for all issuers and are fully determined by credit risk in structural models. I construct a new dataset of domestic corporate and sovereign U.S. dollar bonds, which I use to find that changes in spreads not explained by fundamentals have two large common components that are distinct for each type of debt I study. Using a vector autoregressive (VAR) model, I find that domestic spreads are related to the lagged first component of sovereign spreads. Consequently, even though there is no contemporaneous common component in bond spreads, there seems to be a common component when focusing on the dynamics of these spreads. Traditional macro liquidity variables are related to the common components found in domestic and sovereign spread changes. My findings suggest possible explanations for the common component documented by previous research in domestic debt spreads. My research shows that, after taking into account the dynamics of the common components in credit spreads across debt types, the cost of debt for firms and countries depends to some extent on shocks that affect all types of debt.
Book Synopsis Corporate Credit Risk Changes by : Doron Avramov
Download or read book Corporate Credit Risk Changes written by Doron Avramov and published by . This book was released on 2006 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides new evidence on the empirical success of structural models in explaining corporate credit risk changes. A parsimonious set of common factors and firm-level fundamentals, inspired by structural models, explains more than 54% (67%) of the variation in credit spread changes for medium (low) grade bonds. No dominant latent factor is present in the unexplained variation. While our set of variables has lower explanatory power among high-grade bonds, it does capture most of the systematic variation of credit spread changes in that category as well. It also subsumes the explanatory power of the Fama and French (1993) factors among all grade classes.
Book Synopsis Dynamic Asset Pricing Theory by : Darrell Duffie
Download or read book Dynamic Asset Pricing Theory written by Darrell Duffie and published by Princeton University Press. This book was released on 2010-01-27 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a thoroughly updated edition of Dynamic Asset Pricing Theory, the standard text for doctoral students and researchers on the theory of asset pricing and portfolio selection in multiperiod settings under uncertainty. The asset pricing results are based on the three increasingly restrictive assumptions: absence of arbitrage, single-agent optimality, and equilibrium. These results are unified with two key concepts, state prices and martingales. Technicalities are given relatively little emphasis, so as to draw connections between these concepts and to make plain the similarities between discrete and continuous-time models. Readers will be particularly intrigued by this latest edition's most significant new feature: a chapter on corporate securities that offers alternative approaches to the valuation of corporate debt. Also, while much of the continuous-time portion of the theory is based on Brownian motion, this third edition introduces jumps--for example, those associated with Poisson arrivals--in order to accommodate surprise events such as bond defaults. Applications include term-structure models, derivative valuation, and hedging methods. Numerical methods covered include Monte Carlo simulation and finite-difference solutions for partial differential equations. Each chapter provides extensive problem exercises and notes to the literature. A system of appendixes reviews the necessary mathematical concepts. And references have been updated throughout. With this new edition, Dynamic Asset Pricing Theory remains at the head of the field.
Book Synopsis Estimating the systematic component of credit spreads by : Sebastian Wilde
Download or read book Estimating the systematic component of credit spreads written by Sebastian Wilde and published by GRIN Verlag. This book was released on 2022-08-31 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Book Synopsis An Econometric Model of Credit Spreads with Rebalancing, Arch and Jump Effects by : Herman J. Bierens
Download or read book An Econometric Model of Credit Spreads with Rebalancing, Arch and Jump Effects written by Herman J. Bierens and published by . This book was released on 2008 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we examine the dynamic behavior of credit spreads on corporate bond portfolios. We propose an econometric model of credit spreads that incorporates portfolio rebalancing, the near unit root property of spreads, the autocorrelation in spread changes, the ARCH conditional heteroscedasticity, jumps, and lagged market factors. In particular, our model is the first that takes into account explicitly the impact of rebalancing and yields estimates of the absorbing bounds on credit spreads induced by such rebalancing. We apply our model to nine Merrill Lynch daily series of option-adjusted spreads with ratings from AAA to C for the period January 1997 through August 2002. We find no evidence of mean reversion in these credit-spread series over our sample period. However, we find ample evidence of both the ARCH effect and jumps in the data especially in the investment-grade credit spread indices. Incorporating jumps into the ARCH type conditional variance results in significant improvements in model diagnostic tests. We also find that while log spread variations depend on both the lagged Russell 2000 index return and lagged changes in the slope of the yield curve, the time-varying jump intensity of log credit spreads is correlated with the lagged stock market volatility. Finally, our results indicate the ARCH-jump specification outperforms the ARCH specification in the out-of-sample, one-step-ahead forecast of credit spreads.
Book Synopsis Exploring Common Factors in the Term Structure of Credit Spreads by : Seung C. Ahn
Download or read book Exploring Common Factors in the Term Structure of Credit Spreads written by Seung C. Ahn and published by . This book was released on 2012 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a new approach to model the common variation in the term structure of credit spreads. The novelty is that common factors are extracted using canonical relations between credit spreads and observable economic variables. We show how these factors can be used to test if a given set of macroeconomic and financial variables is sufficient to capture all the systematic variation in response variables, such as credit spreads. We find that credit spread innovations are subject to three common factors, two strong factors and one weak factor, and they account for 49% of the total variation. The first strong factor is related to the contemporaneous state of the economy, the second represents expectations about future economic conditions, and the weak factor is mainly related to the error correction processes in short-term spreads.
