Factors Affecting the Yields on Noninvestment Grade Bond Indices: A cointegration analysis
by Theodore M. Barnhill, Jr. of George Washington University,
Abstract. This study examines the long- and short-run dynamics of the yields on noninvestment grade indices. Utilizing cointegration techniques, the traditional yield spread model is found to be inadequate. A revised model finds a long-run relationship between noninvestment grade yields, Treasury securities, and default rates. Error correction models are formulated to model the short-run dynamics of different segments of the market. These models include a long-run equilibrium (between yields, default rates, and Treasuries), mutual fund flows, minor bond ratings, debt subordination measures, a stock index, and a January effect. Segmentation in the noninvestment grade market is also demonstrated.
Keywords: Cointegration, Noninvestment grade, High yield, Yield spread, Market segmentation.
Published in: Journal of Empirical Finance, Vol. 7, No. 1, (May 2000), pp. 57-86.