Determinants of Credit Spread Changes: Evidence from the Australian Bond Market

This paper is one of the first to examine the empirical determinants of credit spread changes oncorporate bonds in the Australian market. Eight different credit spread changes are analysedcorresponding to bonds of four different credit ratings and four different maturity ranges. Weinvestigate the explanatory power of several variables derived from structural models ofcorporate default. Also included in the analysis are variables designed to capture the liquiditycomponent of the credit spread. Results indicate that changes in the spot rate and changes in theslope of the yield curve are the most important determinants of credit spread changes. Overall,the model is able to describe a large proportion of the variation in credit spread changes – up to60 percent. The model provides the best fit for credit spreads in well established bond markets.