A re-examination of the impact of credit ratings and economic factors on state bond yields

Chihwa Kao, Chunchi Wu

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

In this article we re-examine the impact of credit ratings and economic factors on state bond yields using a two-step model. In the first step, we adopt an ordered probit technique to obtain consistent estimates of state bond default risk. In the second step, we estimate state bond risk premiums using a regression analysis with a categorized risk variable obtained from the first step. Similar to Terza (1987) and Hsiao (1983), the model involves a categorized ordinal explanatory (rating) variable. However, our two-step model deals with a case where category thresholds are unknown and dependent on economic factors. The model provides consistent estimates for the effects of ratings and economic factors on state bond yields. Contrary to previous findings, we find that state bond yields are mainly affected by fundamental economic variables.

Original languageEnglish (US)
Pages (from-to)59-78
Number of pages20
JournalReview of Quantitative Finance and Accounting
Volume4
Issue number1
DOIs
StatePublished - Mar 1 1994

Keywords

  • municipal bond rating
  • ordered probit
  • state bond yields
  • two-step estimates

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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