An analysis of global credit risk spreads during crises

Purpose - The purpose of this paper is to model the components of credit risk in primary debt markets and evaluate changes in these factors in times of crisis. Design/methodology/approach - The authors use a unique dataset consisting of nearly 163,000 new loans and bond issues in the USA and internationally during the period January 1992 through December 2005. Findings - The authors find that credit spreads are related to market liquidity, best represented by total proceeds, ratings and the interaction between maturity and rating. The authors control for various crisis periods, including regional financial crises and find that spreads generally increased in response to the Asian Crisis with the international markets exhibiting the larger increases. There is mixed evidence of asymmetric effects of shocks. In the US loan markets, the adjustment factor reduces forecast variance (Theta 1 < 0). In contrast, the adjustment factor is not significant for US bonds, possibly indicating a more rapid adjustment and greater efficiency in this market. The opposite effect is seen in the international loan and bond markets with Theta 1 > 0, indicating a persistent increase in spread volatility. Originality/value - The paper extends our understanding of the components of primary credit spreads and the interactions between primary debt markets during crisis periods.