Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market

67 Pages Posted: 2 Mar 2020 Last revised: 29 Oct 2020

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Bibo Liu

Tsinghua University - PBC School of Finance

Zhan Shi

Tsinghua University - PBC School of Finance

Date Written: August 31, 2020

Abstract

What drives short-term credit spreads: credit risk, liquidity risk, or both? Despite a large empirical literature on corporate yield spreads, very few studies have examined this important question. Using a novel data set of secondary market transaction prices of Chinese commercial papers, we investigate the determinants of short-term credit spreads within the structural framework of credit risk modeling. In particular, we propose and test a structural model with rollover risk, jump risk, and market illiquidity that allows us to decompose commercial paper yield spreads into a credit component and a liquidity component in a unified manner. We find that both credit and liquidity factors are important determinants of short-term spreads and that, on average, the proposed structural model can largely match levels of commercial paper spreads. Furthermore, our decomposition results indicate that jump risk and market liquidity make equally important contributions to commercial paper spreads.

Keywords: Corporate credit spreads, Structural credit risk models, Commercial papers, Debt market liquidity

JEL Classification: G12, G13

Suggested Citation

Huang, Jing-Zhi Jay and Liu, Bibo and Shi, Zhan, Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market (August 31, 2020). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3530408 or http://dx.doi.org/10.2139/ssrn.3530408

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Bibo Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Zhan Shi (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing, 100083
China
86-10-62780862 (Phone)

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