Testing the elasticity of corporate yield spreads

Gady Jacoby, Rose C. Liao, Jonathan A. Batten

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

What drives the compensation demanded by investors in risky bonds? Longstaff and Schwartz (1995) predict that one key factor is the time-varying negative correlation between interest rates and the yield spreads on corporate bonds. However, the effects of callability and taxes also need to be considered in empirical analyses. Canadian bonds have no tax effects, yet, after controlling for callability, the correlation between riskless interest rates and corporate bond spreads remains negligible. Our results provide support for reduced-form models that explicitly define a default hazard process and untie the relation between the firms asset value and default probability.

Original languageEnglish (US)
Pages (from-to)641-656
Number of pages16
JournalJournal of Financial and Quantitative Analysis
Volume44
Issue number3
DOIs
StatePublished - Jun 2009
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Testing the elasticity of corporate yield spreads'. Together they form a unique fingerprint.

Cite this