The Norwegian financial bond market - A comprehensive market review with an empirical analysis of the main drivers of spreads

Abstract

In this paper, we examine the Norwegian financial bond market, i.e. the market for bonds issued by Norwegian banks. We describe the market by characterizing the market participants in the different securities on both the supply side and the demand side. The main contribution of the paper is in analyzing the price formation processes, and identifying underlying drivers of spreads on senior and subordinated bank bonds. We examine relations between explanatory variables and bond spreads at various quantiles of the distribution of the dependent variable, using quantile regression. We find that spreads on senior bank bonds are affected by equity volatility and inflation, whereas spreads on subordinated bonds are affected by equity volatility, inflation and the yield curve slope. Being able to fully explain the entire distribution of credit spreads, we find that relations between the dependent and explanatory variables are stronger at the tails of the distributions of the dependent variables than closer to the median.