The IMF has released its Global Financial Stability Report for April 09 (hat tip: Menzie Chinn of Econbrowser), in which they highlight some work by Sergei Antoshin on corporate bond spreads.
Box 1.5 on page 51 of the PDF is hardly a full academic treatise, but we can take things as they come:
This study attempts to model corporate bond spreads based on a cash-flows approach to explain the underlying key drivers. The equilibrium spreads are ultimately determined by cash flows or internal funds available to bond issuers and bond buyers. The study identifies factors affecting the cash flows from operating, investing, and financing activities across the major classes of bond issuers and bond holders. The drivers are intended to represent expected profitability, uncertainty, and liquidity constraints. The model displays linkages among financial strains in major sectors of the economy, asset returns, financial and economic risks, macroeconomic activity, and losses in the system.
Previous studies of corporate spreads have found it difficult to explain the sharp increase in spreads during the recent crisis. The conventional approach is to regress spreads on a broad range of macroeconomic and financial variables. Large residuals arising from these models are attributed to an unexplained component driven by illiquidity premia. In this study, spreads are modeled by explicitly accounting for illiquidity premia and funding strains.
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The capital flows framework developed in this study allows one to capture explicitly the effects of stress in various economic sectors on corporate spreads. The analysis suggests that corporate spreads can be largely explained by the fundamentals and risks related to both uncertainty and financing constraints. Policy implications should be drawn with caution, since, as with any regression analysis, the equations display measures of correlation rather than causality. For example, if the LIBOR-OIS spread were to decline by 50 basis points—possibly as a result of some policy action—it would be associated with a roughly 100 basis point decline in corporate spreads. This provides some perspective on the scale of challenges and potential benefits for policymakers contemplating intervention in the market for corporate finance.
I’m suspicious of the high degree of parameterization and the relatively short period shown in the graph; there’s not really a lot of meat given in the box to determine whether the author’s genuinely on to something or not.