C.Castagnetti E.Rossi
Euro
corporate bonds risk factors
Quaderni di Dipartimento #182 (02-06)
Dipartimento di economia politica e metodi quantitativi
Università degli studi di Pavia
Abstract
This paper investigates the determinants of
credit spread changes on bonds denominated in euro. The analysis is carried out
using a panel data on euro bonds. We try to asses the relative importance of
market and idiosyncratic factors in explaining the movements in credit spread.
Because credit spread changes can be easily viewed as an excess return of
corporate bonds over treasury, we adopt a factor model framework. We consider
different approaches to the estimation of common factors using a panel of
monthly redemption yields on a set
of corporate bonds for a time span of three years. Our results suggest that the
euro corporate market is widely heterogeneous and illiquid. Neither the issue
specific factors nor the aggregate common factors appear important in
determining credit spread changes. However, an unobserved common factor,
identified as a liquidity factor seems to drive a relevant component of the
systematic changes in credit
spreads.