Skip to main content
SpringerLink
Log in

Determinants of corporate credit spread: evidence from India

  • Research Article
  • Published:
DECISION Aims and scope Submit manuscript

Abstract

Understanding the behavior of corporate credit spread is of paramount importance to understand and manage risk in fixed income securities. This study examines the determinants of corporate credit spread in Indian bond market. By adopting a panel data approach, the study estimates a fixed-effects regression equation to analyze the determinants of corporate credit spread in Indian bond market. The variables used in the study are motivated from structural models and macroeconomic variables and include interest rate variables, stock market variables, inflation and economic growth. The study found that the interest rate variables, stock market variables and inflation are the key variables in explaining the level of corporate credit spread in Indian bond market. The results are robust to the traditional approach of using aggregate yield spread for the whole sample and also when the sample was divided using different industrial classification. Overall, the study highlights the importance of stable interest rate and inflationary environment for the development of Indian corporate bond market.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Altman EI, Kishore VM (1996) Almost everything you wanted to know about recoveries on defaulted bonds. Financ Anal J 52(6):57–64

    Article  Google Scholar 

  • Arellano M (1987) Computing robust standard errors for within group estimators. Oxford Bull Econ Stat 49(4):431–434

    Article  Google Scholar 

  • Azad ASMS, Chazi A, Cooper P, Ahsan A (2017) What determines the Japanese corporate credit spread? A new evidence. Res Int Bus Finance. https://doi.org/10.1016/j.ribaf.2017.07.168

    Google Scholar 

  • Baltagi BH (2005) Econometric analysis of panel data, 3rd edn. Wiley, New York

    Google Scholar 

  • Batten JA, Jacoby G, Liao RC (2014) Corporate yield spreads and real interest rates. Int Rev Financ Anal 34:89–100

    Article  Google Scholar 

  • Black F, Cox JC (1976) Valuing corporate securities: some effects of bond indenture provisions. J Finance 31(2):351–367

    Article  Google Scholar 

  • Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81(3):637–654

    Article  Google Scholar 

  • Boss M, Scheicher M (2002) The determinants of credit spread changes in the euro area. BIS Pap 12:181–1999

    Google Scholar 

  • Breusch TS (1978) Testing for autocorrelation in dynamic linear models. Aust Econ Pap 17(31):334–355

    Article  Google Scholar 

  • Breusch TS, Pagan AR (1979) A simple test for heteroscedasticity and random coefficient variation. Econometrica 47:1287–1294

    Article  Google Scholar 

  • Breusch TS, Pagan AR (1980) The Lagrange multiplier test and its application to model specification in econometrics. Rev Econ Stud 47(1):239–253

    Article  Google Scholar 

  • Campbell JY, Taksler GB (2003) Equity volatility and corporate bond yields. J Finance 58(6):2321–2350

    Article  Google Scholar 

  • Champagne C, Coggins F, Sodjahin A (2017) Corporate bond market interdependence: credit spread correlation between and within U.S. and Canadian corporate bond markets. North Am J Econ Finance 41:1–17

    Article  Google Scholar 

  • Chen H (2010) Macroeconomic conditions and the puzzles of credit spreads and capital structure. J Finance 65(6):2171–2212

    Article  Google Scholar 

  • Chen L, Lesmond DA, Wei J (2007) Corporate yield spreads and bond liquidity. J Finance 62(1):119–149

    Article  Google Scholar 

  • Chen TK, Chen YS, Liao HH (2011) Labor unions, bargaining power and corporate bond yield spreads: structural credit model perspectives. J Bank Finance 35(8):2084–2098

    Article  Google Scholar 

  • Chen R, Yang L, Wang W, Tang L (2015) Discovering the impact of systemic and idiosyncratic risk factors on credit spread of corporate bond within the framework of intelligent knowledge management. Ann Oper Res 234(1):3–15

    Article  Google Scholar 

  • Chun MO, Dionne G, François P (2014) Credit spread changes within switching regimes. J Bank Finance 49:41–55

    Article  Google Scholar 

  • Collin-Dufresne P, Goldstein RS, Martin JS (2001) The determinants of credit spread changes. J Finance 56(6):2177–2207

    Article  Google Scholar 

  • Covitz D, Downing C (2007) Liquidity or credit risk? The determinants of very short-term corporate yield spreads. J Finance 62(5):2303–2328

    Article  Google Scholar 

  • Cox JC, Ingersoll JE, Ross SA (1985) A theory of the term structure of interest rates. Econometrica 53(2):385–407

    Article  Google Scholar 

  • David A (2008) Inflation uncertainty, asset valuations, and the credit spreads puzzle. Rev Financ Stud 21(6):2487–2534

    Article  Google Scholar 

  • Davies A (2008) Credit spread determinants: an 85 year perspective. J Financ Mark 11(2):180–197

    Article  Google Scholar 

  • Demirovic A, Tucker J, Guermat C (2015) Accounting data and the credit spread: an empirical investigation. Res Int Bus Finance 34:233–250

    Article  Google Scholar 

  • Duffee GR (1998) The relation between treasury yields and corporate bond yield spreads. J Finance 53(6):2225–2241

    Article  Google Scholar 

  • Duffee GR (1999) Estimating the price of default risk. The Review of Financial Studies 12(1):197–226

    Article  Google Scholar 

  • Duffie D, Singleton KJ (1999) Modeling term structures of defaultable bonds. Rev Financ Stud 12(4):687–720

    Article  Google Scholar 

  • Duffie D, Saita L, Wang K (2007) Multi-period corporate default prediction with stochastic covariates. J Financ Econ 83(3):635–665

    Article  Google Scholar 

  • Elton EJ, Gruber MJ, Agrawal D, Mann C (2001) Explaining the rate spread on corporate bonds. J Finance 56(1):32

    Article  Google Scholar 

  • Gencay R, Signori D, Xue Y, Yu X, Zhang K (2015) Economic links and credit spreads. J Bank Finance 55(131):157–169

    Article  Google Scholar 

  • Georgoutsos D, Kounitis T (2016) Treasury yields and credit spread dynamics: a regime-switching approach. J Econ Asymmet 14:39–51

    Article  Google Scholar 

  • Geske R (1977) The valuation of corporate liabilities as compound options. J Financ Quantit Anal 12(4):541–552

    Article  Google Scholar 

  • Godfrey LG (1978) Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica 46:1293–1302

    Article  Google Scholar 

  • Grandes M, Panigo DT, Pasquini RA (2017) Corporate credit spreads and the sovereign ceiling in Latin America. Emerg Mark Finance Trade 53(5):1217–1240

    Article  Google Scholar 

  • Helwege J, Huang JZ, Wang Y (2014) Liquidity effects in corporate bond spreads. J Bank Finance 45(1):105–116

    Article  Google Scholar 

  • Huang J-Z, Huang M (2012) How much of the corporate-Treasury yield spread is due to credit risk? Rev Asset Pricing Stud 2(2):153–202

    Article  Google Scholar 

  • Jarrow RA, Turnbull SM (1995) Pricing derivatives on financial securities subject to credit risk. J Finance 50(1):53–85

    Article  Google Scholar 

  • Jarrow RA, Lando D, Turnbull SM (1997) A markov model for the term structure of credit risk spreads. Rev Financ Stud 10(2):481–523

    Article  Google Scholar 

  • Jayadev M, Jacob J (2010) Default risk characteristics of poll-based bond spreads: evidence from India. J Emerg Mark Finance 9(1):51–70

    Article  Google Scholar 

  • Kim J, Ramaswamy K, Sundaresan S (1993) Does default risk in coupons affect the valuation of corporate bonds? A contingent claims model. Financ Manag 22(3):117–131

    Article  Google Scholar 

  • Landschoot AV (2008) Determinants of yield spread dynamics: euro versus US dollar corporate bonds. J Bank Finance 32(12):2597–2605

    Article  Google Scholar 

  • Leake J (2003) Credit spreads on sterling corporate bonds and the term structure of UK interest rates. Bank of England working paper (202)

  • Leland HE (1994) Corporate debt value, bond covenants, and optimal capital structure. J Finance 49(4):1213–1252

    Article  Google Scholar 

  • Longstaff FA, Schwartz ES (1995) A simple approach to valuing risky fixed and floating rate debt. J Finance 50(3):789–819

    Article  Google Scholar 

  • Lu C-W, Chen T-K, Liao H-H (2010) Information uncertainty, information asymmetry and corporate bond yield spreads. J Bank Finance 34(9):2265–2279

    Article  Google Scholar 

  • Merton RC (1973) Theory of rational option pricing. Bell J Econ Manag Sci 4(1):141–183

    Article  Google Scholar 

  • Merton RC (1974) On the pricing of corporate debt: the risk structure of interest rates. J Finance 29(2):449–470

    Google Scholar 

  • Merton RC (1977) On the pricing of contingent claims and the Modigliani–Miller theorem. J Financ Econ 5(2):241–249

    Article  Google Scholar 

  • Pavlova I, Hibbert AM, Barber JR, Dandapani K (2015) Credit spreads and regime shifts. J Fixed Income 25(1):58–74

    Article  Google Scholar 

  • Radier G, Majoni A, Njanike K, Kwaramba M (2016) Determinants of bond yield spread changes in South Africa. Afr Rev Econ Finance 8(2):50–81

    Google Scholar 

  • Raghavan S, Sarwano D (2012) Development of corporate bond market in India: an empirical and policy analysis. In: International conference on economics and finance research, IPEDR, vol 32

  • Sengupta R, Anand V (2015) Corporate debt market in India: Issues and challenges. India development report 2014–15

  • Sensarma R, Bhattacharya I (2016) The impact of monetary policy on corporate bonds in India. J Policy Model 38:587–602

    Article  Google Scholar 

  • Tang DY, Yan H (2010) Market conditions, default risk and credit spreads. J Bank Finance 34(4):724–734

    Article  Google Scholar 

  • Tsuji C (2005) The credit- spread puzzle. J Int Money Finance 24(7):1073–1089

    Article  Google Scholar 

  • Warga AD (1991) Corporate bond price discrepancies in the dealer and exchange markets. J Fixed Income 1(3):7–16

    Article  Google Scholar 

  • White H (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48:817–838

    Article  Google Scholar 

  • Wimanda RE, Turner PM, Hall MJB (2011) Expectations and the inertia of inflation: the case of Indonesia. J Policy Model 33(3):426–438

    Article  Google Scholar 

  • Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT Press, Cambridge

    Google Scholar 

  • Wooldridge JM (2013) Introductory econometrics: a modern approach, 5th edn. CENGAGE Learning, Boston

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Indian Institute of Management Raipur, Raipur, India

    Bhanu Pratap Singh Thakur, M. Kannadhasan & Vinay Goyal

Authors
  1. Bhanu Pratap Singh Thakur
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. M. Kannadhasan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Vinay Goyal
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bhanu Pratap Singh Thakur.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Thakur, B.P.S., Kannadhasan, M. & Goyal, V. Determinants of corporate credit spread: evidence from India. Decision 45, 59–73 (2018). https://doi.org/10.1007/s40622-018-0179-7

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40622-018-0179-7

Keywords

JEL Classification

Search

Navigation