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Focusing on a set of investment grade corporate
yields covering four industries, three maturities, and four ratings,
principal components analysis is employed in order to estimate the
number of common factors that account for their sample covariance
structure. The empirical findings suggest that a two-factor
representation is statistically acceptable, a finding consistent
with previous research as well as with existing theoretical models.
Furthermore, we explore the role of rating, maturity, and sector in
explaining cross-sectional differences across investment grade
yields’ risk premia. We conclude that these factors account for a
large and significant part of the observed variation. Additionally,
we are able to estimate the quantitative effect of these factors on
the risk premium embodied in credit spreads. |