Demystifying Yield Spread on Corporate Bonds Trades in India

  • Kedar nath MukherjeeEmail author


This paper aims to study the dynamics of corporate bond yield spread in India, and attempted to identify the possible determinants: bonds’ liquidity, credit quality and therefore their yield spreads. A large sample of daily corporate bond trade data over a period of 6 years (2011–2016), classified into Issuers Segment-wise and Rating-wise, are analyzed within a basic statistical framework and using panel regression model. Default risk, as captured by the credit rating, is found to significantly affect the yield spread, for all types of securities. Even if the summary statistics and panel regression results broadly support the relationship between bond liquidity, captured through various bond characteristics and trade statistics, and yield spread, use of better liquidity proxy measure may improve the said relationship. Movements in equity market also affect corporate bond yield spread in India.


Corporate bond Yield spread Credit spread Determinants Liquidity Panel regression 

JEL Classification

C13 C23 G10 G12 



The author is thankful to Fixed Income Money Market and Derivatives Association (FIMMDA), Mumbai, India, for providing access to their database for this research work. The author also extend a sincere thanks to his institute (NIBM, Pune, INDIA) for providing all the necessary support and infrastructure to complete this research.


  1. Acharya, V., Amihud, Y., & Bharath, S. (2010). Liquidity risk of corporate bond returns. Working Paper-16394, National Bureau of Economic Research. Source:
  2. Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time—series effects. Journal of Financial Markets, 5, 31–56.CrossRefGoogle Scholar
  3. Bao, J., Pan, J., & Wang, J. (2008). Liquidity of corporate bonds. Working Paper, MIT Sloan School of Management. Source:
  4. Bao, J., Pan, J., & Wang, J. (2011). The illiquidity of corporate bonds. Journal of Finance, 66, 911–946.CrossRefGoogle Scholar
  5. Beber, A., Brandt, M. W., & Kavajecz, K. A. (2009). Flight-to-quality or flight-to-liquidity? Evidence from the euro-area bond markets. Review of Financial Studies, 22(3), 925–957.CrossRefGoogle Scholar
  6. Campbell, J. Y., & Taksler, G. B. (2003). Equity volatility and corporate bond yields. The Journal of Finance, LVIII(6), 2321–2349.CrossRefGoogle Scholar
  7. Chakravarty, S., & Sarkar, A. (1999). Liquidity in US fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets. Working Paper, Federal Reserve Bank of New York. Source:
  8. Chen, L., Lesmond, D. A., & Wei, J. (2007). Corporate yield spreads and bond liquidity. The Journal of Finance, LXII(1), 119–149.CrossRefGoogle Scholar
  9. Collin-Dufresne, P., Goldstein, R. S., & Martin, J. S. (2001). The determinants of credit spread changes. The Journal of Finance, LVI(6), 2177–2207.CrossRefGoogle Scholar
  10. Covitz, D., & Downing, C. (2007). Liquidity or credit risk? The determinants of very short-term corporate yield spreads. Journal of Finance, 62, 2303–2328.CrossRefGoogle Scholar
  11. Crabbe, L. E., & Turner, C. M. (1995). Does the liquidity of a debt issue increase with its size? Evidence from the corporate bond and medium-term note markets. The Journal of Finance, 50(5), 1719–1734.CrossRefGoogle Scholar
  12. Diaz, A., & Navarro, E. (2002). Yield spread and term to maturity: Default vs. liquidity. European Financial Management, 8(4), 449–477.CrossRefGoogle Scholar
  13. Dick-Nielsen, J., Feldhutter, P., & Lando, D. (2012). Corporate bond liquidity before and after the onset of the subprime crisis. Journal of Financial Economics, 103, 471–492.CrossRefGoogle Scholar
  14. Elton, E. J., Gruber, M. J., Agrawal, D., & Mann, C. (2001). Explaining the rate spread on corporate bonds. The Journal of Finance, LVI(1), 247–277.CrossRefGoogle Scholar
  15. Ericsson, J., & Renault, O. (2006). Liquidity and credit risk. The Journal of Finance, LXI(5), 2219–2250.CrossRefGoogle Scholar
  16. Friewald, N., Jankowitsch, R., & Subrahmanyam, M. G. (2012). Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises. Journal of Financial Economics, 105, 18–36.CrossRefGoogle Scholar
  17. Houweling, P., Mentink, A., & Vorst, T. (2005). Comparing possible proxies of corporate bond liquidity. Journal of Banking & Finance, 29, 1331–1358.CrossRefGoogle Scholar
  18. Jankowitsch, R., Nashikkar, A., & Subrahmanyam, M. G. (2011). Price dispersion in otc markets: A new measure of liquidity. Journal of Banking & Finance, 35(2), 343–357.CrossRefGoogle Scholar
  19. Jing-zhi, H., & Huang, M. (2002). How much of the corporate-treasury yield spread is due to credit risk? The Review of Asset Pricing Studies, 2, 153–202.Google Scholar
  20. Jong, F. D., & Driessen, J. (2006). Liquidity risk premia in corporate bond markets. Working paper, Tilburg University and University of Amsterdam. Source:
  21. Landschoot, A. V. (2004). Determinants of euro term structure of credit spreads. NBB Working Paper (No. 57), July 2004. Source:
  22. Landschoot, A. V. (2008). Determinants of yield spread dynamics: Euro versus US dollar corporate bonds. Journal of Banking & Finance, 32(12), 2597–2605.CrossRefGoogle Scholar
  23. Lin, H., Liu, S., & Wu, C. (2008). Non-default components of corporate yield spreads: taxes or liquidity? Working Paper. Source:
  24. Longstaff, F., Mithal, S., & Neis, E. (2004). Corporate yield spreads: default risk or liquidity? New evidence from the credit-default swap market. Working Paper, National Bureau of Economic Research. Source: (
  25. Papageorgiou, N., & Skinner, F. S. (2006). Credit spreads and the treasury zero coupon spot curve. Working Paper. Source:
  26. Pape, U., & Schlecker, M. (2007). Are credit spreads and interest rates co-integrated? Empirical analysis in the USD corporate bond market. ESCP-EAP Working Paper (No. 25), European School of Management. Source:
  27. Roll, R. (1984). A simple implicit measure of the effective bid–ask spread in an efficient market. Journal of Finance, 39, 1127–1139.CrossRefGoogle Scholar
  28. Shah, S. N., & Kebewar, M. (2012). US corporate bond yield spread a default risk debate. Working Paper, University of Orleans (France).Google Scholar

Copyright information

© Springer Japan KK, part of Springer Nature 2019

Authors and Affiliations

  1. 1.National Institute of Bank Management (NIBM)PuneIndia

Personalised recommendations