Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation.
The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Inhaltsverzeichnis (Table of Contents)
- 1 Introduction
- 2 Literature review
- 3 Systematic risk and debt beta
- 4 Corporate bond risk
- 4.1 Credit risk
- 4.1.1 Default risk determinants
- 4.1.2 Bond valuation and default risk premium
- 4.2 Liquidity risk
- 4.3 Systematic risk
- 4.1 Credit risk
- 5 Empirical analysis
- 5.1 Data description and spread measurement
- 5.2 Estimation of the default risk premium
- 5.3 Estimation of the systematic credit spread
- 5.4 Regime-dependent analysis of systematic credit spreads.
- 5.5 Discussion of results
- 6 Implications on debt beta
- 7 Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This master's thesis aims to investigate the systematic component of credit spreads, which is a crucial factor in determining the risk and return of corporate bonds. The study utilizes empirical data to analyze the relationship between credit spreads and various economic factors, including default risk, liquidity risk, and systematic risk.
- Analysis of the systematic component of credit spreads
- Investigation of the relationship between credit spreads and economic factors
- Empirical assessment of the default risk premium and its impact on credit spreads
- Exploration of the role of liquidity risk in shaping credit spreads
- Analysis of the influence of systematic risk on corporate bond returns
Zusammenfassung der Kapitel (Chapter Summaries)
- Chapter 1: Introduction This chapter introduces the research topic, outlining the significance of understanding the systematic component of credit spreads in corporate finance. It sets the stage for the research question and provides a brief overview of the methodology used.
- Chapter 2: Literature review This chapter explores the relevant literature on credit spreads, systematic risk, and corporate bond valuation. It summarizes previous research findings and identifies gaps in the existing knowledge that the current study seeks to address.
- Chapter 3: Systematic risk and debt beta This chapter delves into the concept of systematic risk and its relationship to debt beta, explaining how these factors influence the pricing of corporate bonds. It provides a theoretical framework for understanding the relationship between systematic risk and credit spreads.
- Chapter 4: Corporate bond risk This chapter focuses on the specific risk factors affecting corporate bonds. It examines credit risk, including default risk determinants and the valuation of bonds considering default risk premiums. The chapter also explores liquidity risk and the role of systematic risk in corporate bond pricing.
- Chapter 5: Empirical analysis This chapter presents the empirical analysis of the systematic component of credit spreads. It describes the data used, including spread measurement techniques, and outlines the methods employed for estimating the default risk premium, systematic credit spread, and regime-dependent analysis of systematic credit spreads. The chapter concludes with a discussion of the empirical results obtained.
- Chapter 6: Implications on debt beta This chapter discusses the implications of the findings regarding the systematic component of credit spreads on the determination of debt beta. It examines how the understanding of systematic credit spreads can improve the accuracy of debt beta calculations.
Schlüsselwörter (Keywords)
The central focus of this master's thesis lies in understanding the systematic component of credit spreads. The study explores various aspects of corporate bond risk, including default risk, liquidity risk, and systematic risk. Key concepts investigated include debt beta, bond valuation, credit risk premiums, and the influence of economic factors on credit spreads. Empirical analysis using data and regression models plays a crucial role in determining the relationships between these factors.
- Quote paper
- M.Sc. Sebastian Wilde (Author), 2022, Estimating the systematic component of credit spreads, Munich, GRIN Verlag, https://www.grin.com/document/1267016
