The determinants of credit spread changes in Japan

Shinsuke Ohyama and Takuya Sugimoto
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Shinsuke Ohyama: Bank of Japan
Takuya Sugimoto: Bank of Japan

No 07-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In this paper, we examine the relationship between credit spread changes in Japan and financial and macroeconomic variables such as the risk-free interest rate and stock price indices. We use a model that belongs to the class of so-called structural models for corporate bond pricing originally developed by Merton (1974) and extended by Longstaff and Schwartz (1995) among others. Our empirical results indicate that credit spreads in Japan are negatively correlated with the risk-free interest rate and with corporate financial conditions (which stand proxy for the market valuations of firms). The magnitude of such correlations increases as the credit ratings of the bond issuers decline. These results are consistent with the implications of structural models and with the related literatures in the U.S. and Europe. We also find that credit spreads in Japan are positively correlated with the implied volatility of interest rates. In other words, an increase in uncertainty about future interest-rate contributes to the widening in credit spreads.

Date: 2007-02
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Citations: View citations in EconPapers (4)

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