SERIAL ISSUE EVIDENCE FOR THE RELATION BETWEEN THE RISK STRUCTURE AND MATURITY: A DECOMPOSITION METHODOLOGY

R. M. Robinson and M. A. Robinson

Journal of Financial Research, 1998, vol. 21, issue 1, 65-84

Abstract: The risk structure of the interest rates literature shows that coupon effects can cause changes in yield spreads as maturity lengthens. These effects make it difficult to empirically isolate the default risk component of the spread for coupon‐paying bonds. Attempts to calculate zero‐coupon risk structures suffer from the relative scarcity of zero‐coupon corporate bonds. We show that yield spreads for coupon‐paying bonds that are identical except for default risk decompose into a relative duration component, a premium discount coupon component, and a default component. We present closed‐form solutions for measuring the first two components so that the default risk portions can be isolated as residuals. We further present an empirical application of the decomposition metrics for sixteen exchange‐traded serial issues and nonparametrically examine the relation between the default premia and maturity. We find various maturity relations.

Date: 1998
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https://doi.org/10.1111/j.1475-6803.1998.tb00270.x

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