Explaining credit spread changes: New evidence from option-adjusted bond indexes

Jing Zhi Huang, Weipeng Kong

Research output: Contribution to journalArticlepeer-review

37 Scopus citations

Abstract

This is an examination of the determinants of corporate bond credit spreads using both weekly and monthly option-adjusted spreads for nine Merrill Lynch corporate bond indexes from January 1997 through July 2002. The Russell 2000 index historical return volatility and the Conference Board composite leading and coincident economic indicators have significant power in explaining credit spread changes, especially for high-yield indexes. These three variables plus the interest rate level, the historical interest rate volatility, the yield curve slope, the Russell 2000 index return, and a high-minuslow factor together can explain more than 40% of credit spread changes for five bond indexes. These eight variables together can explain 67.68% and 60.82% of credit spread changes for the B and BBrated indexes. The analysis confirms that credit spread changes for high-yield bonds are more closely related to equity market factors and also provides evidence in favor of incorporating macroeconomic factors into credit risk models.

Original languageEnglish (US)
Pages (from-to)30-44
Number of pages15
JournalJournal of Derivatives
Volume11
Issue number1
DOIs
StatePublished - Sep 1 2003

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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