EQUITY VOLATILITY COMPONENTS AND CORPORATE CREDIT SPREADSAmer Demirović Renata Lučić DOI 10.7251/ZREFB2519005D |
Published 12/30/2025 |
ABSTRACT
This paper decomposes equity volatility into the systematic and idiosyncratic components and examines how they affect corporate credit spreads. The relationship between equity volatility and credit spreads is positive only for firms with low credit quality. For high credit quality firms, the effect is negative, suggesting that an increase in equity volatility is associated with a narrower rather than wider credit spread. The positive leg of the relationship is primarily driven by idiosyncratic volatility, while a decrease in credit spreads of high-quality firms is associated with an increase in systematic volatility. The results are robust to controlling for firm size and bond characteristics.