A macro-financial analysis of the corporate bond market

Abstract

We assess the contribution of economic and Önancial factors in the determination of euro area corporate bond spreads over the period 2001-2015. The proposed multi-market, no arbitrage a¢ ne term structure model is based on the methodology proposed by Dewachter, Iania, Lyrio, and Perea (2015). We model jointly the ërisk-free curveí, measured by overnight index swap (OIS) rates, and the corporate yield curves for two rating classes (A and BBB). The model includes four spanned and six unspanned factors. We Önd that, in general, both economic (real activity and ináation) and Önancial factors (proxying risk aversion, áight to liquidity and general Önancial market stress) play a signiÖcant role in the determination of the spanned factors and hence in the dynamics of the risk-free yield curve and corporate bond spreads. Across the risk-free OIS curve, macroeconomic and Önancial factors are each responsible on average for explaining 30 and 65 percent of yield varation, respectively. For A and BBB-rated corporate debt, the selected Önancial variables explain on average 50 percent of the variation in corporate spreads during the last decade.