The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market


  • The authors appreciate helpful comments from an anonymous referee as well as from Malcolm Baker, John Y. Campbell, Peter Feldhütter, Robin Greenwood, Rustam Ibragimov and Peter Tufano. This paper was (further) developed while Manfred Frühwirth was a visiting professor at the Weatherhead Center for International Affairs at Harvard University in the academic year 2005/2006. The author appreciates the support, resources and opportunities provided by the Weatherhead Center during this time.


This article presents joint econometric analysis of interest rate risk, issuer-specific risk (credit risk) and bond-specific risk (liquidity risk) in a reduced-form framework. We estimate issuer-specific and bond-specific risk from corporate bond data in the German market. We find that bond-specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer-specific vs. bond-specific spread on the level and the volatility of the total spread. Issuer-specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk-free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock's return and the distance to default. For the bond-specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk-free term structure and the specific stock's return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.