Macro Factors in the Term Structure of Credit Spreads
Bank for International Settlements, Monetary and Economic Department, 2006 - Corporate bonds - 61 pages
We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables -- indicators of real activity, inflation and financial conditions -- as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs as a forward--looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher-rated bonds.
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Decomposing lnstantaneous Spreads
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affine functions Apr 00 Apr Apr 96 Apr Apr O0 B-rated bonds B-rated spreads basis points BBB and B-rated BBB-rated industrial Berndt bond yields business cycle corporate bond corporate bond market corporate spreads countercyclical credit spreads Curvature debt default event risk default risk Driessen Duffee Duffie EDFsTM equations estimates of physical Ferguson and Schranz ﬁltered ﬁnancial activity factor ﬁnancial activity indicator ﬁnancial conditions ﬁnd ﬁnding ﬁrms impact implied volatility IMPVOL increase inﬂation instantaneous spreads latent factors loss given default macro factors macroeconomic variables market price maturities measure monthly observable variables Panel parameters PCOM physical default intensities physical intensities Piazzesi price of default prices of systematic rating categories real activity recovery regression risk premia risk-free rate risk-neutral instantaneous risk-neutral intensities sample period Singleton Slope speciﬁcation statistically signiﬁcant systematic risk term structure model Treasury curve Treasury yields Variance marg variation yield curve yields and corporate yields and spreads