The Nonlinear Dynamics of Corporate Bond Spreads: Regime-Dependent Effects of Their Determinants

54 Pages Posted: 10 Apr 2019

See all articles by Henning Fischer

Henning Fischer

Deutsche Bundesbank

Oscar Anselm Stolper

University of Marburg | Behavioral Finance Research Group

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

This paper studies the behavior of corporate bond spreads during different market regimes between 2004 and 2016. Applying a Markov-switching vector autoregressive (MS-VAR) model, we document that the dynamic impact of spread determinants varies substantially with market conditions. In periods of high volatility, systematic credit risk - rather than interest rate movements - contributes to driving up spreads. Moreover, while market-wide liquidity risk is not priced when volatility is low, it becomes a crucial factor during stress periods. Our results challenge the notion that spreads predominantly capture credit risk and suggest it must be reassessed during periods of financial distress.

Keywords: corporate bond spreads, regime dependency, Markov switching, vector autoregression, credit spread puzzle

JEL Classification: C32, C34, C58, G12

Suggested Citation

Fischer, Henning and Stolper, Oscar Anselm, The Nonlinear Dynamics of Corporate Bond Spreads: Regime-Dependent Effects of Their Determinants (2019). Deutsche Bundesbank Discussion Paper No. 08/2019, Available at SSRN: https://ssrn.com/abstract=3368357 or http://dx.doi.org/10.2139/ssrn.3368357

Henning Fischer (Contact Author)

Deutsche Bundesbank ( email )

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

Oscar Anselm Stolper

University of Marburg | Behavioral Finance Research Group ( email )

Am Plan 1
Marburg, 35032
Germany

HOME PAGE: http://https://www.uni-marburg.de/de/fb02/professuren/bwl/behavioralfinance

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