Journal of Financial Services Research

, Volume 29, Issue 3, pp 177–210

Macroeconomic Conditions, Firm Characteristics, and Credit Spreads

Original Article

DOI: 10.1007/s10693-006-7625-y

Cite this article as:
Tang, D.Y. & Yan, H. J Finan Serv Res (2006) 29: 177. doi:10.1007/s10693-006-7625-y


We study a structural model that allows us to examine how credit spreads are affected by the interaction of macroeconomic conditions and firm characteristics. Unlike most other structural models, our model explicitly incorporates equilibrium macroeconomic dynamics and models a firm's cash flow as primitive processes. Corporate securities are priced as contingent claims written on cash flows. Default occurs when the firm's cash flow cannot cover the interest payments and the recovery rate is dependent on the economic condition at default. Our model produces the following predictions: (i) credit spread is mostly negatively correlated with interest rate; (ii) credit spread yield curves are upward sloping for low-grade bonds; (iii) firm characteristics have significant effects on credit spreads and these effects also vary with economic conditions. These predictions are consistent with the available empirical evidence and generate implications for further empirical investigation.


Default riskMacroeconomic conditionsCredit spreads

JEL Classifications


Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  1. 1.Department of Economics and Finance, Coles College of BusinessKennesaw State UniversityKennesawUSA
  2. 2.U.S. Securities & Exchange Commission, Office of Economic AnalysisWashingtonUSA
  3. 3.Deparment of Finance, McCombs School of BusinessUniversity of Texas at AustinAustinUSA