| In the first chapter, I construct a unique corporate bond database with more than 240,000 observations. I use this database and the Nelson-Siegel method to interpolate the corporate yield curves for the three rating classes Aa, A, and Baa. The sample period spans January 1990 to December 2007, which is one of the longest in the corporate bond literature, covering three recessions and multiple credit events.;In the second chapter, I analyze default risk premia by decomposing the credit spreads into expected loss and default risk premia. I show that these risk premia are time varying and that they are increasing with declining credit quality. As a percentage of the credit spreads, the risk premia are more important for Aa-rated corporate bonds with short maturities, because the expected loss tends to be small for high quality short maturity bonds. The two components of the credit spreads behave different during economic downturns and credit crises. During economic contractions when credit risk is high, the expected loss explains a large fraction of the credit spreads. During credit crises such as the LTCM crisis and the Russian default crisis the expected loss does not change significantly and the jump in the credit spreads can be explained by a jump in the default risk premium.;In the third chapter, I examine the interaction between the fixed income and the credit market. I decompose the credit spreads into a fixed income component and a credit market specific component using a dynamic term structure model. The fixed income component is further separated into the fixed income liquidity spread and the credit component of the swap spread. I find that the contributions of the liquidity spread and the swap credit component to the credit spread curves are remarkably flat across maturities. The increasing term structure of the credit spreads is mainly driven by the increasing term structure of the credit market specific component. Finally, I analyze the impact of a flight-to-liquidity crisis on the credit market, and find that credit spread curves widen and flatten as a result of liquidity shocks. |
