The Association between systematic risk measures for bond and default risk : a study of the Thai bond market

Abstract

The yield differences of corporate bonds are caused by different issue characteristics that cause differences in the risk premiums. The greatest impact on the premium for domestic bonds is its risk of default relative to other bonds. However, the default risk differences between bonds have changed dramatically overtime depending on prevailing economic conditions. When the economy experiences a recession, the probability of default should increases This implies that default risk is one of the factors that determines systematic risk. the purpose of this paper is to investigate the relationship between systematic risk measures for bond and default risk in the Thai bond market. First it is examined whether of not corporate bonds exhibit systematic risk. Then the market model regression for each bond in the sample is examined using each of the three indices: 1) S-ONE market yield: 2) S-ONE bond index: and 3) SET index. Then the relationship between this view of bond risk and measures of default risk is analysed by examining the extent to which bond ratings and internal corporate variables explain cross-sectional variation of bond β’s. the empirical study found no relationship between systematic risk measures for bond and default risk because this research study is limited by two major factors, namely: the number of debentures and the limited period of time covered by the study itself.