Review of Finance Vol. 27 No. 2 2023
Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market
Abstract
What drives short-term credit spreads: credit risk, liquidity risk, or both? We investigate this issue using the structural approach to credit risk modeling and a novel data set of secondary market transaction prices for Chinese commercial papers (CPs). In particular, we propose and test a structural model with jump risk and exogenous market illiquidity under which the predicted yield spreads can be decomposed into a credit component and a liquidity component. We find that credit risk and, especially liquidity risk, are important determinants of short-term yield spreads. Our model-based decomposition results show that, on average, credit risk and market liquidity account for about 25% and 52% of CP yield spreads, respectively. For comparison, we also examine the drivers of the US CP yield spreads using security-level data. We find that credit risk accounts for a small fraction of the observed yield spreads but liquidity contributes a much greater proportion.
- DOI
- 10.1093/rof/rfac030
- Volume
- 27
- Issue
- 2
- Pages
- 539-579
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref