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An empirical analysis of the relationship of bond yield spreads and macro economic factors

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  • George Athanassakos
  • Peter Carayannopoulos

Abstract

This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industrial production), the opposite is true for utilities.

Suggested Citation

  • George Athanassakos & Peter Carayannopoulos, 2001. "An empirical analysis of the relationship of bond yield spreads and macro economic factors," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 197-207.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:2:p:197-207
    DOI: 10.1080/096031001750071596
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    References listed on IDEAS

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    1. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
    2. Gregory R. Duffee, "undated". "Treasury Yields and Corporate Bond Yield Spreads: An Empirical Analysis," Finance and Economics Discussion Series 1996-20, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    3. Edwin J. Elton & T. Clifton Green, 1997. "Tax and Liquidity Effects in Pricing Government Bonds," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-2, New York University, Leonard N. Stern School of Business-.
    4. Edwin J. Elton & T. Clifton Green, 1997. "Tax and Liquidity Effects in Pricing Government Bonds," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-029, New York University, Leonard N. Stern School of Business-.
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    Cited by:

    1. Takaoka, Sumiko, 2018. "Is there a safety premium in the design of corporate bond contracts?," MPRA Paper 86422, University Library of Munich, Germany.
    2. Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1153-1164.
    3. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.
    4. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 164, European Central Bank.
    5. Takaoka, Sumiko & McKenzie, C.R., 2006. "The impact of bank entry in the Japanese corporate bond underwriting market," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 59-83, January.
    6. Richter, Sylvia & Heyde, Frank & Horsch, Andreas & Wünsche, Andreas, 2021. "Determinants of project bond prices – Insights into infrastructure and energy capital markets," Energy Economics, Elsevier, vol. 97(C).
    7. Jonathan Batten & Warren Hogan & Gady Jacoby, 2005. "Measuring credit spreads: evidence from Australian Eurobonds," Applied Financial Economics, Taylor & Francis Journals, vol. 15(9), pages 651-666.
    8. Chia-Chien Chang & Chou-Wen Wang & Szu-Lang Liao, 2009. "The valuation of special purpose vehicles by issuing structured credit-linked notes," Applied Financial Economics, Taylor & Francis Journals, vol. 19(3), pages 227-256.
    9. Maria Bonilla-Musoles & Leandro Garcia-Menendez & Ma Luisa Marti-Selva, 2007. "Efficiency in the eurobond market: application of nonparametric techniques," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 431-444.
    10. Brian BARNARD, 2017. "Rating Migration and Bond Valuation: Decomposing Rating Migration Matrices from Market Data via Default Probability Term Structures," Expert Journal of Finance, Sprint Investify, vol. 5(1), pages 49-72.
    11. Takaoka, Sumiko, 2018. "Convenience yield on government bonds and unconventional monetary policy in Japanese corporate bond spreads," MPRA Paper 86418, University Library of Munich, Germany.
    12. Brian BARNARD, 2018. "Rating Migration and Bond Valuation: Ahistorical Interest Rate and Default Probability Term Structures," Expert Journal of Finance, Sprint Investify, vol. 6(1), pages 16-30.
    13. Gabe de Bondt, 2004. "The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 219-228.
    14. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series 0164, European Central Bank.
    15. Brian Barnard, 2019. "Rating Migration and Bond Valuation: Towards Ahistorical Rating Migration Matrices and Default Probability Term Structures," Applied Finance and Accounting, Redfame publishing, vol. 5(1), pages 12-41, February.
    16. Brian BARNARD, 2017. "Rating Migration and Bond Valuation: Decomposing Rating Migration Matrices from Market Data via Default Probability Term Structures," Expert Journal of Finance, Sprint Investify, vol. 5, pages 49-72.

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