A Note on Sector, Rating, and Maturity Effects on Risk Premia

Abstract

Focusing on a set of investment grade corporate yields covering four industries, three_x000D_ 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_x000D_ empirical findings suggest that a two-factor representation is statistically acceptable, a_x000D_ finding consistent with previous research as well as with existing theoretical models. Furthermore, we explore the role of rating, maturity, and sector in explaining crosssectional 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.