This article presents joint econometric analysis of interest rate risk, issuer-specific risk (credit risk) and bond-specific risk (liquidity risk) in a reduced-form framework. We estimate issuer-specific and bond-specific risk from corporate bond data in the German market. We find that bond-specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer-specific vs. bond-specific spread on the level and the volatility of the total spread. Issuer-specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk-free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock’s return and the distance to default. For the bond-specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk-free term structure and the specific stock’s return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.

II THE MOTIVATIONS AND INVESTMENT PREFERENCES OF CHINESE

Moreover, we are grateful to an anonymous referee for helpful comments. This article presents joint econometric analysis of interest rate risk, issuer-specific risk (credit risk) and bond-specific risk (liquidity risk) in a reduced-form framework. We develop a methodology to estimate the model parameters and to separate the different components of risk. We estimate issuer-specific and bond-specific risk from corporate bond data in the German market. We find that bond-specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between the different bonds with respect to the relative influence of issuer-specific vs. bond-specific spread on the level and the volatility of the total spread. As regards issuer-specific risk, we find strong autocorrelation and a strong impact of weekday effects, the level of the risk-free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock’s return and the distance to default. The issuer-specific spread determinants are very different for different issuers. For the bond-specific risk we find a strong autocorrelation, some impact of the stock market index, weekday effects and monthly effects as well as a very weak impact of the risk-free term structure, the stock market volatility and the specific stock’s return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.

Comparing possible proxies of corporate bond liquidity

The paper provides empirical evidence on the pricing of synthetic credit risk securitisation. Securitisation is advantageous both for originating banks, who incur savings on bank capital costs and for investors, who acquire a stake in leveraged credit portfolio risk, an exposure type rarely accessible otherwise. Securitisation is cost-efficiently implemented by structured credit derivatives, issued securities are therefore referred to as synthetic collateralised debt obligations (CDOs). We perform arbitrage-free pricing of synthetic CDOs referring to investment grade European corporate debt, such that a comparison with observed transactions can be drawn. CDO payout rules are formalised, taking both direct risk transfer structures and synthetic transactions using SPVs for excess spread trapping into account. Underlying losses are captured by a reduced-form affine multi-factor model, exploiting the strong observed comovement of corporate spreads for systematic factor estimation. Estimation is performed by Kalman filter-based QML, applied to implied spread structures of recent European corporate bond issues to which originating banks are exposed. Valuation results are obtained for a variety of structural variants. A comparison with transactions accommodating our modelling approach with regard to payout rules and reference debt quality supports the hypothesis that investors have a strong preference for CDO investments: Observed note issuance spreads provide no adequate compensation for the leveraged portfolio risk exposure. Keywords: Credit risk securitisation, Multi-name credit derivatives, Corporate bonds, Reduced-form model, Affine defaultable term structure model, Kalman filter,