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A Note on Sector, Rating, and Maturity Effects on Risk Premia

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  • Konstantinos Drakos

    (Department of Economics, University of Patras, Greece)

Abstract

Focusing on a set of investment grade corporate yields covering four industries, three maturities, and four ratings, principal components analysis is employed in order to estimate the number of common factors that account for their sample covariance structure. The empirical findings suggest that a two-factor representation is statistically acceptable, a finding consistent with previous research as well as with existing theoretical models. Furthermore, we explore the role of rating, maturity, and sector in explaining cross-sectional differences across investment grade yields¡¦ risk premia. We conclude that these factors account for a large and significant part of the observed variation. Additionally, we are able to estimate the quantitative effect of these factors on the risk premium embodied in credit spreads.

Suggested Citation

  • Konstantinos Drakos, 2004. "A Note on Sector, Rating, and Maturity Effects on Risk Premia," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 3(3), pages 201-216, December.
    • Handle: RePEc:ijb:journl:v:3:y:2004:i:3:p:201-216
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    corporate yields; maturity; principal components; rating; sector;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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