The Impact Of Systematic And Idiosyncratic Risk Factors On Credit Spread Of Corporate Bond

Since the issue of China’s first corporate bond on24th September2007,Chinesecorporate bond market has been developing quickly and drawing more and moreattention. Credit spread, which is an important indicator of the credit quality ofcorporate bond, is helpful both in managing credit risk of corporate bond and in makinginvestment decisions. There is a lot of relevant research on credit spread abroad, whileresearch on credit spread of corporate bond is rare in China due to the short history ofthe corporate bond market. Therefore, research on factors that have impact on creditspread is meaningful both in theory and in practice.Bases on the outcome of relevant foreign research and the reality of Chinesecorporate bond market, this paper try to test the impact of systematic and idiosyncraticrisk factors on credit spread of corporate bond. We use all corporate bonds which wereissued by listed companies and traded on Shanghai Stock Exchange before30thDecember2011as our sample.Firstly, to take the impact of term structure into consideration, we computerZero-volatility credit spread series by fitting the yield curve of treasury bonds usingNelson-Siegel-Svesson model. Zero-volatility credit spread is more accurate thannominal credit spread.Secondly, we choose two groups of systematic risk factors and three idiosyncraticrisk factors as factors that have impact on credit spread. The two groups of systematicrisk factors aret he term structure adjusted bond index yield which represents systematicrisk of corporate bond market and the Fama-French three factors of stock whichrepresents systematic risk of stock market.Finally, we use fixed-effect model to test whether each risk factor has criticalrelationship with credit spread and how large is the contribution to the size of creditspread.By analyzing the outcome of panel data regression, we can draw the followingmain conclusions. During2008to2011, the main factor that decides the size of creditspread is the term structure adjusted bond index yield which represents systematic riskof corporate bond market. And it can explain101bps of the average size of credit spread.However, systematic risk factors of stock market the Fama-French three factors have almost no explanatory power on the size of credit spread, which implies that therelationship between Chinese corporate bond market and stock market is low. Inaddition, idiosyncratic risk factors idiosyncratic equity volatility, idiosyncratic bondvolatility and idiosyncratic bond VaR also can explain some of the size of credit spread,with-10bps,34bps and10bps respectively. An interesting outcome here is that we findthere is a critical negative relationship between idiosyncratic equity volatility and creditspread, which is opposite to the finding of relevant foreign research. One possiblereason may be the speculative of Chinese stock market. The regression outcome ofidiosyncratic bond volatility and idiosyncratic bond VaR show that credit spreadcontains premiums of liquidity risk and market risk, which is identified to the outcomeof relevant foreign research.