Determinants of Bond Spreads: Evidence from Credit Derivatives of Australian Firms

Posted: 5 May 2012

See all articles by Tristan Darwin

Tristan Darwin

affiliation not provided to SSRN

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Date Written: April 4, 2012

Abstract

This paper investigates the determinants of credit spreads (levels and changes) via credit derivatives, using an Australian sample. We incorporate a number of different relationships to assess the contributions of various market-wide and firm-specific factors in determining levels, and changes in credit spreads, of corporate bonds. Using over-the-counter credit default swap (CDS) premium data as a proxy for the default risk of the entity, we find that both CDS and liquidity are priced into credit spreads, with liquidity explaining more credit spreads than credit risk (proxied using CDS premia) itself. We also find that a number of firm-specific and market-wide variables, namely, firm leverage, market-to-book ratio, market value, volatility, liquidity, the spot rate, the slope of the yield curve, the time to maturity of the underlying bond and the level and return on the All Ordinaries Index, are in many cases significant determinants of credit spreads. Finally, in additional robustness testing, a potential sample selection bias is accommodated via the Heckman (1979) Sample selection bias as a specification error. Econometrica 47: 153–162) procedure.

Keywords: credit default swap, credit spread, default risk, liquidity, Merton model

Suggested Citation

Darwin, Tristan and Treepongkaruna, Sirimon and Faff, Robert W., Determinants of Bond Spreads: Evidence from Credit Derivatives of Australian Firms (April 4, 2012). Australian Journal of Management, Vol. 37, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2050441

Tristan Darwin

affiliation not provided to SSRN ( email )

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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