Credit Spread Changes and Equity Volatility: Evidence from Daily Data

27 Pages Posted: 11 Jul 2011  

Ann Marie Hibbert

West Virginia University

Ivelina Pavlova

Florida International University (FIU)

Joel R. Barber

Florida International University (FIU) - Department of Management & International Business

Krishnan Dandapani

Florida International University (FIU)

Date Written: August 2011

Abstract

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

Hibbert, Ann Marie and Pavlova, Ivelina and Barber, Joel R. and Dandapani, Krishnan, Credit Spread Changes and Equity Volatility: Evidence from Daily Data (August 2011). Financial Review, Vol. 46, Issue 3, pp. 357-383, 2011. Available at SSRN: https://ssrn.com/abstract=1882145 or http://dx.doi.org/10.1111/j.1540-6288.2011.00304.x

Ann Marie Hibbert (Contact Author)

West Virginia University ( email )

Morgantown, WV 26506
United States

Ivelina Pavlova

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Joel Barber

Florida International University (FIU) - Department of Management & International Business ( email )

University Park
Miami, FL 33199
United States
561-297-2708 (Phone)
561-297-3978 (Fax)

Krishnan Dandapani

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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