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Marco Lyrio

11 December 2018
WORKING PAPER SERIES - No. 2214
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Abstract
We assess the contribution of economic and financial factors in the determination of euro area corporate bond spreads over the period 2001-2015. The proposed multi-market, no-arbitrage affine term structure model is based on the methodology proposed by Dewachter, Iania, Lyrio, and Perea (2015). We model jointly the ‘risk-free curve’, 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 find that, in general, both economic (real activity and inflation) and financial factors (proxying risk aversion, flight to liquidity and general financial market stress) play a significant 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 financial 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 financial variables explain on average 50 percent of the variation in corporate spreads during the last decade.
JEL Code
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy