Financial Frictions in Mexico: Evidence from the Credit Spread and its Components

Este artículo investiga la relación entre las fricciones en los mercados financieros y la actividad económica en México, para lo cual se construye y descompone un diferencial de tasas para los bonos emitidos por empresas privadas no financieras en el mercado interno, basado en Gilchrist y Zakrajsek (2012). Se muestra que el diferencial contiene información significativa sobre la evolución de la actividad económica y de los agregados crediticios. Además, se encuentra que la prima excedente de los bonos (PEB), cuya dinámica describe la relación entre la probabilidad de impago de las empresas y su diferencial de tasas, es el componente con mayor poder predictivo. Se muestra que choques negativos en las condiciones financieras, identificados como innovaciones en PEB, generan una desaceleración en la actividad económica y en el financiamiento. Finalmente, se encuentra evidencia de efectos no lineales en la respuesta de la actividad económica ante este choque.

Investigating the Determinants of Credit Spread Using a Markov Regime-Switching Model: Evidence from Banks in Taiwan

In this study, we investigate the determinants of credit spread using a Markov regime-switching model. We consider corporate governance variables and credit risk to analyze the determinants of credit spread. The corporate governance mechanism is an indicator of company sustainability, and credit spread is the main factor in profits obtained by banks. However, the relationship between credit spread and corporate governance is seldom discussed. We focus on loans from banks in Taiwan between 2000 and 2019 and apply a Markov regime-switching model, which is superior to other models in capturing different effects in various regimes. We specify two regime types: corporate governance and credit risk regimes. Furthermore, we consider four aspects of corporate governance: firm ownership structure, board structure, deviation, and information environment. In this study, the determinants of credit spread are investigated more thoroughly than in previous studies. Moreover, in this study, we examine the effects of monetary policy and economic status on credit spread using a Markov regime-switching model; such models are not employed to their full extent in related studies of credit spread. Empirical results indicate that credit spread has different effects in various regimes. Thus, understanding the determinants of credit spread in different regimes is crucial for financial analysts, investors, economic policymakers, and banks. Consequently, we expect that this study can improve the management and measurement of credit risk and be of value to financial institutions.

Accounting downside risk measures and credit spreads

Purpose This study aims to examine the association between predictive accounting downside risk measures and changes in credit spreads. Building upon the earnings downside risk (EDR) measure developed in prior literature, this paper introduces cash flow downside risk (CFDR). Design/methodology/approach This study modifies an existing empirical framework (root lower partial moment) to calculate CFDR and applies it to a sample of firms between 2002 and 2013 for which credit default swap data are available. Findings After validating the measure, this study identifies a positive association between CFDR and changes in credit spreads. This paper further shows the association between CFDR and credit spread changes is stronger than that between EDR and credit spread changes. Financial stability moderates the relationship between CFDR and credit spreads. Originality/value This study proposes a novel measure of accounting downside risk, CFDR and demonstrates a negative association between this measure and future cash flow and a positive association between this measure and future credit spreads.

Volatility morphology of asset value and credit spread puzzle

Merton model has provided a classic theoretical framework for explaining credit spreads. This paper extends Merton model by introducing morphology factor of asset value volatility in the model, and conducts empirical studies on the effect of asset volatility morphology on credit spreads in China’s bond market. The results show that asset volatility morphology is economically important and can explain credit spreads well. Furthermore, this paper analyzes the asymmetric influences of monetary policy on credit spreads and asset volatility morphology. This paper points out that the responses of credit spreads and asset volatility morphology to monetary policy are consistent in the tight liquidity environments. To this end, monetary policy and liquidity, which are two factors that have been ignored by classic Merton model but proved to have significant influences on credit spreads, play roles in influencing credit spreads by changing volatility morphology of asset value. Since asset volatility morphology can reflect the change of investors’ expectation on the default probability of asset, the argument mentioned in the credit spread puzzle that the fundamentals related to bond default probability cannot explain credit spreads needs to be reexamined.

Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

This study extracts the common factors from firm-based credit spreads of major Japanese corporate bonds and examines the predictive content of the credit spread on the real economy. Instead of employing single-maturity corporate bond spreads, we focus on the entire term structure of the credit spread to predict the business cycle. We extend the dynamic Nelson-Siegel model to allow for both common and firm-specific factors. The results show that the estimated common factors are important drivers of individual credit spreads and have substantial predictive power for future Japanese economic activity. This study contributes to the literature by examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.

Credit Spread Disparity Between Japanese Domestic Bonds and Foreign Bonds

This article is an empirical study of credit spread disparity between Japanese domestic bonds and foreign bonds on primary issuance. There exist differences between credit spreads issued in domestic market and that of foreign market, despite that the credit risk of these bonds are considered the same. We explore this issue and find that the disparity can be explained by the sensitivity to risk-free rate and leverage. In other words, foreign investors put more premium on the credit risk which is driven by risk-free rate factor and leverage factor.