The decomposition and explanation of various parts of credit spreads for sovereign and corporate bonds have long been the focus of econometric literature. We aim to give a rigorous overview of the existing literature that describes various models to quantify components of spreads. Since the early 2000s researchers have investigated various variables to explain the difference between observed bond yields and the risk-free rate. The often-weak ability of default risk to explain this spread has animated the development of models using additional factors. While the typical approach is to look at the isolated corporate bond market, we follow Martell (2008) who looks at the interaction between corporate and government bond markets. We develop a model that can be used for corporate and sovereign bond markets. While much of the existing literature focuses on the U.S. market, our model determines risk components from the European and German government bond market and the European corporate bond market. Therefore, we can quantify various parts of yield spreads and attribute them to different risk factors. We are also interested in the commonalities and differences of both markets. To factor in different types of risk, we follow the literature on government and corporate bonds and use different (macroeconomic) variables. The general idea behind the model can easily be extended to other bond markets in the European Monetary Union.     «

The decomposition and explanation of various parts of credit spreads for sovereign and corporate bonds have long been the focus of econometric literature. We aim to give a rigorous overview of the existing literature that describes various models to quantify components of spreads. Since the early 2000s researchers have investigated various variables to explain the difference between observed bond yields and the risk-free rate. The often-weak ability of default risk to explain this spread has ani...     »