Enhanced Corporate Bond Yield Modelling Incorporating Macroeconomic News Sentiment
33 Pages Posted: 3 Jul 2019
Date Written: November 13, 2017
In this study, we introduce a new method of assessing the credit risk of corporate bonds; where in addition to the historical market data news sentiment data is used. Typically, a higher yield spread is usually associated with higher credit risk. By predicting the upward/downward movement of yield and yield spread accurately, the credit risk associated to the bonds can be detected precisely. The corporate bonds studied are issued after 1 January 2007 by seven chosen companies listed in Euro Stoxx 50 index. The time series of bond yields and news sentiment cover the period from 1 January 2007 to 15 May 2017. The modelling of the dynamics of corporate bond yields and credit spreads are based on ARIMA and ARIMAX models. In the ARIMAX model, macroeconomic and firm-specific news sentiment are used as the external explanatory variable. We examine the effect of several categories of macroeconomics news sentiment and firm-specific news sentiment on corporate bond yield spreads. Furthermore, we separate the positive and negative sentiment and investigate their impact on the forecast of corporate bond yields. It is found that negative country news sentiment and central bank news sentiment are effective during a recession period and positive country news sentiment is effective in the recovery period. Negative government and firm-specific news sentiment, in general, affect corporate bond yield spreads more than positive government and company news sentiment.
Keywords: Macroeconomic News Sentiment, Firm-specific News Sentiment, Autoregressive–moving-average model with exogenous inputs model (ARIMAX)
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