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Credit Spread Changes and Equity Volatility: Evidence from Daily Data


  • We are grateful for the valuable comments of session participants at the 2008 French Finance Association meeting, the 2010 meeting of the Southwestern Finance Association (SWFA) in Dallas, Texas and the 2010 meeting of the Eastern Finance Association (EFA) in Miami, Florida. We also would like to thank the editor and an anonymous referee for helpful comments and suggestions. Partial funding for this work was provided by the Florida International Bankers Association (FIBA).

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We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high-yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.