ABSTRACT OF PAPER
Title: A Term Structure Model of Credit Spreads with Observable Heterogeneous Macro Factors for the Euro Zone
Author: Wilkes Arne, Schiereck Dirk, Füss Roland
This paper proposes an affine term structure model of risk-free yields and corporate credit spreads for the European bond market. In addition to latent factors, observable heterogeneous macro factors which are linked to inflation, real and financial activity are included. Following the approach of Ang and Piazzesi (2003) and Amato and Luisi (2006) the term structure is modeled simultaneously by using yield and macroeconomic data of the Euro zone for the period from January 2000 to September 2008. The empirical evidence suggests that the European bond market is highly integrated, even though macro factors and credit ratings are heterogeneous to a certain degree. Furthermore, while the global financial crisis has a substantial impact on variation of credit spread curves, several macroeconomic variables are useful in explaining large parts of credit spread movements in times of market disturbances.
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