Explain the Determinants of Credit Spreads in the US

Abstract

This paper focuses on how economic variables affect Baa corporate bond spreads in the US from January 1990 to December 2018. Credit spreads in this paper are defined as the Baa corporate bond yield minus the Aaa corporate bond yield, and are explained by four variables which are interest rates, the slope of yield curve, the stock market volatility and the economic environment. Cointegration analysis and VAR model are used in this paper to estimate the effects of the determinants of the credit spreads in the long-run and in the short-run respectively. The impacts of the industrial production index and the slope of yield curve on the Baa credit spread are negative, and the impacts of 10 year Treasury bond rate and the stock market volatility on the credit spreads are positive in the long run. In the short-run dynamic relationship, the impact of the industrial production index and the 10 years Treasury bond interest rate are negative for the credit spreads, and the slope of yield curve and stock market volatility are positive for the Baa credit spreads.