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The determinants of credit spread changes in Japan

Author

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  • Shinsuke Ohyama

    (Bank of Japan)

  • Takuya Sugimoto

    (Bank of Japan)

Abstract

In this paper, we examine the relationship between credit spread changes in Japan and financial and macroeconomic variables such as the risk-free interest rate and stock price indices. We use a model that belongs to the class of so-called structural models for corporate bond pricing originally developed by Merton (1974) and extended by Longstaff and Schwartz (1995) among others. Our empirical results indicate that credit spreads in Japan are negatively correlated with the risk-free interest rate and with corporate financial conditions (which stand proxy for the market valuations of firms). The magnitude of such correlations increases as the credit ratings of the bond issuers decline. These results are consistent with the implications of structural models and with the related literatures in the U.S. and Europe. We also find that credit spreads in Japan are positively correlated with the implied volatility of interest rates. In other words, an increase in uncertainty about future interest-rate contributes to the widening in credit spreads.

Suggested Citation

  • Shinsuke Ohyama & Takuya Sugimoto, 2007. "The determinants of credit spread changes in Japan," Bank of Japan Working Paper Series 07-E-4, Bank of Japan.
    • Handle: RePEc:boj:bojwps:07-e-4
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2007/data/wp07e04.pdf
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    References listed on IDEAS

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    1. Kimura Takeshi & Small David H., 2006. "Quantitative Monetary Easing and Risk in Financial Asset Markets," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-54, March.
    2. Rohan Churm & Nikolaos Panigirtzoglou, 2005. "Decomposing credit spreads," Bank of England working papers 253, Bank of England.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Seppo Pynnönen & Warren P. Hogan & Jonathan A. Batten, 2006. "Dynamic equilibrium correction modelling of yen Eurobond credit spreads," The Institute for International Integration Studies Discussion Paper Series iiisdp127, IIIS.
    5. repec:bla:jfinan:v:53:y:1998:i:6:p:2225-2241 is not listed on IDEAS
    6. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    7. Hiroshi Ugai, 2006. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Bank of Japan Working Paper Series 06-E-10, Bank of Japan.
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    Cited by:

    1. Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2017. "The term structure of credit spreads and business cycle in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 45(C), pages 27-36.
    2. Naoto Higashio & Takahiro Hirakawa & Ryo Nagaushi & Shinsuke Ohyama & Atsushi Takanashi, 2016. "Determinants of Launch Spreads on EM USD-Denominated Corporate Bonds," Bank of Japan Working Paper Series 16-E-13, Bank of Japan.
    3. Ephraim Clark & Selima Baccar, 2018. "Modelling credit spreads with time volatility, skewness, and kurtosis," Annals of Operations Research, Springer, vol. 262(2), pages 431-461, March.
    4. Satoshi Tezuka & Yoichi Matsubayashi, 2018. "Credit Spread, Financial Market and Real Activities under Financial Instability: Empirical Evidence with MS-SBVAR," Discussion Papers 1812, Graduate School of Economics, Kobe University.

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