Determinants of bond spreads: Evidence from credit derivatives of Australian firms

Darwin, Tristan, Treepongkaruna, Sirimon and Faff, Robert (2012) Determinants of bond spreads: Evidence from credit derivatives of Australian firms. Australian Journal of Management, 37 1: 29-46. doi:10.1177/0312896211416137

Author Darwin, Tristan
Treepongkaruna, Sirimon
Faff, Robert
Title Determinants of bond spreads: Evidence from credit derivatives of Australian firms
Journal name Australian Journal of Management   Check publisher's open access policy
ISSN 0312-8962
Publication date 2012-04
Sub-type Article (original research)
DOI 10.1177/0312896211416137
Volume 37
Issue 1
Start page 29
End page 46
Total pages 18
Place of publication London, United Kingdom
Publisher Sage Publications
Collection year 2013
Language eng
Abstract This paper investigates the determinants of credit spreads (levels and changes) via credit derivatives, using an Australian sample. We incorporate a number of different relationships to assess the contributions of various market-wide and firm-specific factors in determining levels, and changes in credit spreads, of corporate bonds. Using over-the-counter credit default swap (CDS) premium data as a proxy for the default risk of the entity, we find that both CDS and liquidity are priced into credit spreads, with liquidity explaining more credit spreads than credit risk (proxied using CDS premia) itself. We also find that a number of firm-specific and market-wide variables, namely, firm leverage, market-to-book ratio, market value, volatility, liquidity, the spot rate, the slope of the yield curve, the time to maturity of the underlying bond and the level and return on the All Ordinaries Index, are in many cases significant determinants of credit spreads. Finally, in additional robustness testing, a potential sample selection bias is accommodated via the Heckman ((1979) Sample selection bias as a specification error.
Keyword Credit default swap
Credit spread
Default risk
Merton model
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2013 Collection
UQ Business School Publications
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