Credit Spread Disparity Between Japanese Domestic Bonds and Foreign Bonds

This article is an empirical study of credit spread disparity between Japanese domestic bonds and foreign bonds on primary issuance. There exist differences between credit spreads issued in domestic market and that of foreign market, despite that the credit risk of these bonds are considered the same. We explore this issue and find that the disparity can be explained by the sensitivity to risk-free rate and leverage. In other words, foreign investors put more premium on the credit risk which is driven by risk-free rate factor and leverage factor.