Risk factor analysis and portfolio immunization in the corporate bond market

In this paper we develop a multi-factor model for the yields of corporate bonds. The model allows the analysis of factors which influence the changes in the term structure of corporate bonds. More than 98% of the variability in the corporate bond market is captured by the model, which is then used to develop credit risk immunization strategies for corporate bonds of multiple credit ratings. Empirical results are given for the US market using data for the period 1992–1999.