Exploring the Factors Contributing to Bond Yield Spreads : A Garch Approach

Sammanfattning: The goal of this study is to explore which factors contribute to bond yield spreads. To achieve this goal, this study utilizes a variety of GARCH models to find the best-fitting models to describe our data samples of callable, and non-callable bonds. By measuring the goodness of fit, E-GARCH was selected as the best-fitting model for the non-callable case. In the callable case, the E-GARCH, T-GARCH, and P-GARCH all presented a good fit. The result of this study suggests that implied volatility, interest rate, and slope of the yield curve all contribute to bond yield spreads. Our main contribution and the most pronounced impact lies in the highly significant variable VIX (our measure of implied volatility), which indicates that market expectations play a pivotal role as the main contributor to bond yield spreads.