Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193666
Authors: 
Fischer, Henning
Stolper, Oscar
Year of Publication: 
2019
Series/Report no.: 
Bundesbank Discussion Paper 08/2019
Abstract: 
This paper studies the behavior of corporate bond spreads during different market regimes between 2004 and 2016. Applying a Markov-switching vector autoregressive (MS-VAR) model, we document that the dynamic impact of spread determinants varies substantially with market conditions. In periods of high volatility, systematic credit risk - rather than interest rate movements - contributes to driving up spreads. Moreover, while market-wide liquidity risk is not priced when volatility is low, it becomes a crucial factor during stress periods. Our results challenge the notion that spreads predominantly capture credit risk and suggest it must be reassessed during periods of financial distress.
Subjects: 
corporate bond spreads
regime dependency
Markov switching
vector autoregression
credit spread puzzle
JEL: 
C32
C34
C58
G12
ISBN: 
978-3-95729-564-4
Document Type: 
Working Paper
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