TITLE:
Explain the Determinants of Credit Spreads in the US
AUTHORS:
Wenqi Zhang
KEYWORDS:
Corporate Bond Spreads, Dynamic Relationships, Cointegration, VAR
JOURNAL NAME:
Open Journal of Business and Management,
Vol.9 No.2,
March
29,
2021
ABSTRACT: This paper focuses on how economic variables affect Baa corporate bond spreads
in the US from January 1990 to December 2018. Credit spreads in this paper are defined
as the Baa corporate bond yield minus the Aaa corporate bond yield, and are explained
by four variables which are interest rates, the slope of yield curve, the stock
market volatility and the economic environment. Cointegration analysis and VAR model
are used in this paper to estimate the effects of the determinants of the credit
spreads in the long-run and in the short-run respectively. The impacts of the
industrial production index and the slope of yield curve on the Baa credit
spread are negative, and the impacts of 10 year Treasury bond rate and the
stock market volatility on the credit spreads are positive in the long run. In the short-run dynamic relationship, the
impact of the industrial production index and the 10 years Treasury bond
interest rate are negative for the credit spreads, and the slope of yield curve
and stock market volatility are positive for the Baa credit spreads.