Systematic or Idiosyncratic? Spillover Effects in Corporate Bond Markets and Portfolio Implications

15th INFINITI Conference on International Finance

30 Pages Posted: 27 Apr 2017 Last revised: 22 Jun 2017

See all articles by Evangelos Salachas

Evangelos Salachas

Athens University of Economics and Business

Demir Bektic

Deka Investment GmbH; Darmstadt University of Technology; IQ-KAP; International University of Monaco

Michael Wegener

Deka Investment GmbH

Date Written: April 28, 2017

Abstract

Periods with high financial distress and uncertainty are characterized by increased co-movement in corporate bond markets. In this paper, we study the dynamic interactions among corporate bond returns in a period from 2004 to 2016 that covers important macroeconomic, financial and political events. In particular, we provide a framework for the evaluation of contagion among corporate bonds in different regions during a period with increased financial turmoil. We measure contagion in terms of dynamic spillovers, which capture the degree of homogeneity in bond returns. Our specification distinguishes two sources of bond risk: the systematic risk and the idiosyncratic risk. To account for a market-level analysis of co-movement, we employ a panel VAR model in which the variables (bond markets) are treated as endogenous. Based on our results, the systematic risk component accounts for a larger portion of variation in bond returns relative to the idiosyncratic component, indicating the existence of homogeneity in global corporate bond markets. The emerging markets are also net receivers of international shocks, whereas innovations in U.S. bond markets contribute importantly to the instability in global bond markets.

Keywords: Contagion, Panel VAR, Spillover indices, Financial stability, Systematic risk, Idiosyncratic risk, Corporate bonds

JEL Classification: E27, E44, E52, F37, G15

Suggested Citation

Salachas, Evangelos and Bektic, Demir and Wegener, Michael, Systematic or Idiosyncratic? Spillover Effects in Corporate Bond Markets and Portfolio Implications (April 28, 2017). 15th INFINITI Conference on International Finance. Available at SSRN: https://ssrn.com/abstract=2959493 or http://dx.doi.org/10.2139/ssrn.2959493

Evangelos Salachas (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

Demir Bektic

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Darmstadt University of Technology ( email )

Universitaets- und Landesbibliothek Darmstadt
Magdalenenstrasse 8
Darmstadt, Hesse D-64289
Germany

IQ-KAP ( email )

Frankfurt am Main
Germany

International University of Monaco ( email )

2 Av Prince Hereditaire Albert
Stade Louis II/B
Monaco, Monaco MC-98000
United States

Michael Wegener

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

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