Credit Spread Changes and Equity Volatility: Evidence from Daily Data
27 Pages Posted: 11 Jul 2011
Date Written: August 2011
We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high‐yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.
Keywords: corporate bonds, yield spread, volatility
JEL Classification: G12
Suggested Citation: Suggested Citation