Explain the Determinants of Credit Spreads in the US

Abstract

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