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

Forthcoming in: Journal of Economics and Statistics

59 Pages Posted: 24 Jan 2021

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: December 3, 2020

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 (December 3, 2020). Forthcoming in: Journal of Economics and Statistics, Available at SSRN: https://ssrn.com/abstract=3741904

Henning Fischer

Deutsche Bundesbank ( email )

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

Oscar Anselm Stolper (Contact Author)

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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