Investigating the Corporate Spread: a Non-parametric Approach

This paper studies corporate spread indices using non-parametric techniques. It investigates determinants of risk premia, an important feature of credit risk, using a non-parametric multi-factor term-structure model of the corporate spread. The model, which measures the difference between risky yield on defaultable bonds and risk-free Treasury yields, involves the rate of inflation, a key macroeconomic variable that is found to explain the spread non-linearly. This approach demonstrates the usefulness of non-linear approaches in contrast with standard linear approaches. The model is also useful to forecast the future course of the spread. This paper studies corporate spread indices using non-parametric techniques. The corporate spread, regarded by economists as an informative leading indicator of the US economy, measures the extra return of corporate bonds on their government counter-parts. This study has a substantial practical importance because corporate debt is one of the largest asset classes in financial markets. It is relevant also because spreads on corporate bonds are easily interpreted as measures of the risk premium on defaultable assets, and thi