The Smile of Corporate Bonds : Size Risk Premium on the Swedish Corporate Bond Market

Sammanfattning: This paper examines whether the total amount issued of a company has an effect on corporate bonds’ yield spreads on the Swedish debt capital market. With panel data regression of over 150,000 observations from over 20 investment graded companies, it is found that the relationship is smile-like. Companies with lower and higher amount of issued bonds have a higher yield spread compared to those in the middle-size range of the same credit risk. The significance hold after controlling for other regressors such as bond-specific, firm-specific, and macroeconomic variables. The effect can be viewed as a market-illiquidity problem from the theory of constrained investors where Swedish issuers outgrow the smaller SEK market and the yield spread levels are not fully explained by default risk determinants. The paper’s result indicates that the total amount outstanding of a company has a role in explaining the dynamics of corporate bonds’ yield spread.