Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market*

Jingzhi Huang, Bibo Liu and Zhan Shi

Review of Finance, 2023, vol. 27, issue 2, 539-579

Abstract: What drives short-term credit spreads: credit risk, liquidity risk, or both? We investigate this issue using the structural approach to credit risk modeling and a novel data set of secondary market transaction prices for Chinese commercial papers (CPs). In particular, we propose and test a structural model with jump risk and exogenous market illiquidity under which the predicted yield spreads can be decomposed into a credit component and a liquidity component. We find that credit risk and, especially liquidity risk, are important determinants of short-term yield spreads. Our model-based decomposition results show that, on average, credit risk and market liquidity account for about 25% and 52% of CP yield spreads, respectively. For comparison, we also examine the drivers of the US CP yield spreads using security-level data. We find that credit risk accounts for a small fraction of the observed yield spreads but liquidity contributes a much greater proportion.

Keywords: Commercial paper; Corporate yield spreads; Corporate debt illiquidity; Jump risk; Credit spread puzzle; Structural credit risk models (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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