Factors Affecting the Yields on Noninvestment Grade Bond Indices: A cointegration analysis

by Theodore M. Barnhill, Jr. of George Washington University,
Frederick L. Joutz of George Washington University, and
William F. Maxwell of Texas Tech University

May 2000

Abstract. This study examines the long- and short-run dynamics of the yields on noninvestment grade indices. Utilizing cointegration techniques, the traditional yield spread model is found to be inadequate. A revised model finds a long-run relationship between noninvestment grade yields, Treasury securities, and default rates. Error correction models are formulated to model the short-run dynamics of different segments of the market. These models include a long-run equilibrium (between yields, default rates, and Treasuries), mutual fund flows, minor bond ratings, debt subordination measures, a stock index, and a January effect. Segmentation in the noninvestment grade market is also demonstrated.

JEL Classification: C31, C52, G10.

Keywords: Cointegration, Noninvestment grade, High yield, Yield spread, Market segmentation.

Published in: Journal of Empirical Finance, Vol. 7, No. 1, (May 2000), pp. 57-86.

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