The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market

28 Pages Posted: 24 Aug 2010

See all articles by Manfred Frühwirth

Manfred Frühwirth

affiliation not provided to SSRN

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Leopold Sögner

Institute for Advanced Studies (IHS); Vienna Graduate School of Finance (VGSF)

Abstract

This article presents joint econometric analysis of interest rate risk, issuer-specific risk (credit risk) and bond-specific risk (liquidity risk) in a reduced-form framework. We estimate issuer-specific and bond-specific risk from corporate bond data in the German market. We find that bond-specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer-specific vs. bond-specific spread on the level and the volatility of the total spread. Issuer-specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk-free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock's return and the distance to default. For the bond-specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk-free term structure and the specific stock's return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.

Suggested Citation

Frühwirth, Manfred and Schneider, Paul Georg and Sögner, Leopold, The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market. European Financial Management, Vol. 16, Issue 4, pp. 658-685, September 2010, Available at SSRN: https://ssrn.com/abstract=1662695 or http://dx.doi.org/10.1111/j.1468-036X.2009.00503.x

Manfred Frühwirth (Contact Author)

affiliation not provided to SSRN

No Address Available

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Leopold Sögner

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
484
PlumX Metrics