Explaining Credit Spread Changes: Some New Evidence from Option-Adjusted Spreads of Bond Indices

New York University, Stern School of Business Finance Paper No. 03-013

Posted: 28 Jun 2003

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Weipeng Kong

Pennsylvania State University

Multiple version iconThere are 5 versions of this paper

Date Written: June 2003

Abstract

We examine the question of the determinants of corporate bond credit spreads using both weekly and monthly option-adjusted spreads for nine corporate bond indices from Merrill Lynch from January 1997 to July 2002. We find that the Russell 2000 index historical return volatility and Conference Board composite leading and coincident economic indicators have significant power in explaining credit spread changes, especially for high yield indices. Furthermore, these three variables plus the interest rate level, the historical interest rate volatility, the yield curve slope, the Russell 2000 index return, and the Fama-French [1996] high-minus-low factor can explain more than 40% of credit spread changes for five bond indexes. In particular, these eight variables can explain 67.68% and 60.82% of credit spread changes for the B- and BB rated indexes, respectively. Our 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.

Suggested Citation

Huang, Jing-Zhi Jay and Kong, Weipeng, Explaining Credit Spread Changes: Some New Evidence from Option-Adjusted Spreads of Bond Indices (June 2003). New York University, Stern School of Business Finance Paper No. 03-013, Available at SSRN: https://ssrn.com/abstract=412500 or http://dx.doi.org/10.2139/ssrn.412500

Jing-Zhi Jay Huang (Contact Author)

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Weipeng Kong

Pennsylvania State University

University Park
State College, PA 16802
United States