An analysis of global credit risk spreads during crises

Abstract

PurposeThe purpose of this paper is to model the components of credit risk in primary debt markets and evaluate changes in these factors in times of crisis.Design/methodology/approachThe authors use a unique dataset consisting of nearly 163,000 new loans and bond issues in the USA and internationally during the period January 1992 through December 2005.FindingsThe authors find that credit spreads are related to market liquidity, best represented by total proceeds, ratings and the interaction between maturity and rating. The authors control for various crisis periods, including regional financial crises and find that spreads generally increased in response to the Asian Crisis with the international markets exhibiting the larger increases. There is mixed evidence of asymmetric effects of shocks. In the US loan markets, the adjustment factor reduces forecast variance (Θ1<0). In contrast, the adjustment factor is not significant for US bonds, possibly indicating a more rapid adjustment and greater efficiency in this market. The opposite effect is seen in the international loan and bond markets with Θ1>0, indicating a persistent increase in spread volatility.Originality/valueThe paper extends our understanding of the components of primary credit spreads and the interactions between primary debt markets during crisis periods.

Improving Value for Money in Italian Project Finance

“…A further complementary problem is represented by the credit crunch occurred since 2008, with an impact on both loan availability and credit spreads (Morgan and Murtagh, 2012). Scarcer and more expensive funds have a direct impact on investments and a somewhat surreptitious effect on their long-term risk, affecting bankability and debt service.…”

A new approximation for the risk premium with large risks

“…The finding that rare events significantly alter equity risk premium in the market lends well to the concept that risk was mispriced during these times. Studies such as Morgan and Murtagh (2012) and Avino et al (2013) show empirically this concept through measuring credit spreads during crises, particularly showing the notion that credit spreads are related to market liquidity. In these types of cases, the link between the Arrow-Pratt approximation and the risk premium is tenuous at best.…”