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Aggregate Illiquidity and Credit Risk in the Swedish Bond Market: A comparative study between mortgage bonds and corporate bonds
Örebro University, Örebro University School of Business.
Örebro University, Örebro University School of Business.
2021 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

While regulators give more attention to aggregate credit and market illiquidity, the scientific community share less attention to how these risk sources dynamically affect bond yield spreads. We study these risk sources on yield spreads for Swedish Investment Grade corporate bonds and mortgage bonds with residual maturities of two- and five-years leading up to the Covid-19 outbreak. Between 2015 and 2020, we form a pre-Covid-19 sample, a full sample, and a sample for 2020 in isolation with three regression frameworks. Market illiquidity is represented by a constructed Bid-Ask index and aggregated credit risk is represented by an existing European Credit Default Swap index. We find that additional safety provided by collateral in mortgage bonds are particularly noticeable in times when aggregated credit levels radically increase. We also document a, although not consistent, significant joint relationship between aggregate credit and illiquidity in which drive yield spread widenings further than would be observed if modelled in a bivariate- or multivariate framework. Implied by the interaction regression, market illiquidity is driving corporate yield spreads more independently from credit when including 2020 in the dataset. From five-year corporate bonds, results show that aggregate credit explains in general more of yield spread variations while illiquidity shocks tend to have a larger impact on yield spreads. Less significance is found for illiquidity effects on mortgage bonds.

Place, publisher, year, edition, pages
2021. , p. 32
Keywords [en]
Yield Spreads, Corporate Bonds, Mortgage Bonds, Investment Grade, Collateral, Residual Maturity, Market Illiquidity, Aggregate Credit Risk.
National Category
Economics
Identifiers
URN: urn:nbn:se:oru:diva-89234OAI: oai:DiVA.org:oru-89234DiVA, id: diva2:1524826
Subject / course
Nationalekonomi
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Examiners
Available from: 2021-02-02 Created: 2021-02-02 Last updated: 2021-02-02Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf