What Factors Influence European Corporate Bond Spread?

Abstract

This paper examines the main determinants of corporate euro-bond spread. We analyse a large sample of corporate euro-country bonds over the period May 2005 -January 2012, considering three sub-periods: May 2005- July 2007 (pre-crisis period), August 2007-April 2010 (worldwide financial crisis) and May 2010-January 2012 (European sovereign debt crisis).
 
 We show that both liquidity risk and risk related to the country of the issuing firms affect corporate bond spread. We also find that the market yield of corporate bonds issued in the main European countries is, other things being equal, strongly influenced by the risk of the corresponding sovereign bonds and Credit Default Swap (CDS). Finally, we compare the yields of bonds issued by banks with those of bonds issued by firms from other sectors and find that the spread, other things being equal, is significantly higher for banks. These findings may have operating implications for market activity, regulators and policy makers.