Modeling of Yield Spreads of Bonds on Primary and Secondary Market

Because of the rapid development of the Russian credit market in the past decades, understanding the formation of corporate bond yield spreads is becoming more relevant. The objective of this research is to determine factors and their effects on bond yield spreads on primary and secondary market using data on Russian bonds of various maturities in the period from 2014 to 2017, except for bonds issued by banks, insurance companies and other financial institutions. We test the hypothesis of different yield spread on primary and secondary market and construct two predictive models which includes certain macroeconomic fundamentals, characteristics of the firm, terms of issue and specific factors of the market type. The models have acceptable predictive power and reveal the unique patterns of the Russian bond market. A comparative analysis of the two markets shows that the same factors can affect the yield spread in different ways, both the direction of the effect and the intensity. This work is the first research which raises the question of the different formation of the yield spread on the primary and secondary market. Based on the results of the work, market participants can predict the yield spread of corporate bonds: investors can analyze the profitability of their investments more qualitatively, issuers can appreciate the cost of issuing securities, and regulators can take effective measures to develop and strengthen the bond market.