The Time-Varying Impact of Systematic Risk Factors on Corporate Bond Spreads

35 Pages Posted: 20 Aug 2018 Last revised: 18 Nov 2021

See all articles by Arne Klein

Arne Klein

University of Muenster

Kamil Pliszka

Deutsche Bundesbank

Date Written: 2018

Abstract

During the global financial crisis, stressed market conditions led to skyrocketing corporate bond spreads that could not be explained by conventional modeling approaches. This paper builds on this observation and sheds light on time-variations in the relationship between systematic risk factors and corporate bond spreads. First, we apply Bayesian model averaging to a battery of candidate variables for determining meaningful systematic risk factors. Second, Markov switching techniques provide us with an endogenous separation of regimes accounting for times of stress, on the one hand, and for normal market conditions, on the other. Our evidence for market indices of euro-denominated bonds suggests that systematic risk factors play a much more prominent role during periods of market turmoil. Most important, expectations about default rates seem to be much more driven by systematic factors rather than idiosyncratic components during times of market stress.

Keywords: asset pricing, banking regulation, Bayesian model averaging, credit spreads, European bond market, Markov switching

JEL Classification: G01, G10, G11, G12, G14, G15, G32

Suggested Citation

Klein, Arne and Pliszka, Kamil, The Time-Varying Impact of Systematic Risk Factors on Corporate Bond Spreads (2018). Deutsche Bundesbank Discussion Paper No. 14/2018, Available at SSRN: https://ssrn.com/abstract=3234178 or http://dx.doi.org/10.2139/ssrn.3234178

Arne Klein (Contact Author)

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Kamil Pliszka

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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