Corporate bond market interdependence: Credit spread correlation between and within U.S. and Canadian corporate bond markets |
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| Affiliation: | 1. Department of Finance, Business School, Université de Sherbrooke, 2500 Boul. De l’Université, Sherbrooke (QC) J1K 2R1, Canada;2. Department of Accounting, Business Faculty, Université de Moncton, 18 Antonine-Maillet Ave, Moncton (NB) E1A 3A9, Canada;1. Faculty of Business and Law, Deakin University, Geelong, Australia;2. Faculty of Business, Bond University, Gold Coast 4229, Australia;1. Institute of International Business, National Cheng Kung University, Tainan 701, Taiwan, ROC;2. Institute of International Management, National Cheng Kung University, Tainan 701, Taiwan, ROC;1. Universidad Pública de Navarra, Spain;2. Universidad CEU Cardenal Herrera, Spain;1. Department of Mathematics, University of Zagreb, Bijenička 30, Zagreb, Croatia;2. Faculty of Mining, Geology and Petroleum Engineering, University of Zagreb, Pierottijeva 6, Zagreb, Croatia |
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| Abstract: | This study investigates the correlation and interdependence between and within the U.S. and Canadian corporate bond markets. The empirical framework adopted allows credit spreads to depend on common systematic risk factors derived from structural models and incorporates dynamic conditional correlations (DCC) between spreads. Results show that there is a surprisingly weak correlation between the two markets in normal times. However, during crises, there is a sudden and strong increase in the correlation between U.S. and Canadian credit spreads. The analysis of credit spread correlation within each market also shows an unusual increase in credit spread correlations between sectors and between risk classes in the U.S. during the 2007–2009 global financial crisis. This increase persists over the post-crisis period. By contrast, in Canada, credit spread correlations between sectors remain remarkably stable over time, suggesting an interdependence of credit spreads within the Canadian market. |
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| Keywords: | Credit risk Credit spreads Dynamic conditional correlation Interdependence of financial markets |
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