Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market

Jing Zhi Huang, Bibo Liu, Zhan Shi

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


What drives short-term credit spreads: credit risk, liquidity risk, or both? We investigate this issue using the structural approach to credit risk modeling and a novel data set of secondary market transaction prices for Chinese commercial papers (CPs). In particular, we propose and test a structural model with jump risk and exogenous market illiquidity under which the predicted yield spreads can be decomposed into a credit component and a liquidity component. We find that credit risk and, especially liquidity risk, are important determinants of short-term yield spreads. Our model-based decomposition results show that, on average, credit risk and market liquidity account for about 25% and 52% of CP yield spreads, respectively. For comparison, we also examine the drivers of the US CP yield spreads using security-level data. We find that credit risk accounts for a small fraction of the observed yield spreads but liquidity contributes a much greater proportion.

Original languageEnglish (US)
Pages (from-to)539-579
Number of pages41
JournalReview of Finance
Issue number2
StatePublished - Mar 2023

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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