MACROECONOMIC CONDITIONS AND CREDIT SPREADS

This study conducts an empirical examination of the impact of market conditions on credit spreads motivated by recently developed structural credit risk models. Using corporate credit spreads, we find that macroeconomic conditions mainly affect low rated bonds. In particular, the CPI and yield curve slope have significant impact on credit spreads of speculative grade bonds. Also, we find that the explanatory power of the model when spreads are divided by maturity is as large as when spreads are divided by credit rating. In the longest maturity categories, for example, we find that all macroeconomic conditions except for slope of term structure are significantly related to corporate credit spreads. Furthermore, the liquidity and default risks contribute significantly to the yield spreads on corporate bonds.