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Credit Spreads on Corporate Bonds and the Macroeconomy in Japan

by Kiyotaka Nakashima of Kyoto Gakuen University, and
Makoto Saito of Hitotsubashi University

November 2007

Abstract: Using secondary market data on corporate bonds issued in Japan between 1997 and 2005, this paper explores the determinants of the credit spread of corporate bond rates over interest swap rates. We find that credit spreads properly reflect financial factors at the firm level, including debt-to-equity ratios, volatility, and maturity, particularly for longer-term bonds. In addition, an economy-wide factor common among bond issues unable to be captured by firm-level factors, plays an important role in determining credit spreads, and these economy-wide effects to a great extent cancel out firm-level factors for some subsample periods. We also identify possible factors responsible for the significant economy-wide effects.

JEL Classification: G12, G13.

Keywords: credit spreads, corporate bonds, market liquidity.

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