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How much credit should be given to credit spreads?

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  • Lubochinsky, C.

Abstract

This paper sets out to assess the information that can be derived from spreads between yields on government bonds, considered as having a zero default probability, and yields on risky bonds, i.e. whose default probability is not zero. In the first part, we shall give a reminder of the main theoretical approaches used for calculating default risk and its term structure, and, in the second part, we shall examine the difficulties encountered in the empirical analysis of credit spreads. We shall also focus on the problems involved in measuring spreads and the limitations of their information content, given that they may reflect, above and beyond the default risk, the existence of a liquidity risk.

Suggested Citation

  • Lubochinsky, C., 2002. "How much credit should be given to credit spreads?," Financial Stability Review, Banque de France, issue 1, pages 85-102, November.
    • Handle: RePEc:bfr:fisrev:2002:1:3
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    Cited by:

    1. Coudert, V. & Gex, M., 2006. "Can risk aversion indicators anticipate financial crises?," Financial Stability Review, Banque de France, issue 9, pages 67-87, December.
    2. John Kiff & François-Louis Michaud & Janet Mitchell, 2003. "An Analytical Review of Credit Risk Transfer Instruments," Financial Stability Review, National Bank of Belgium, vol. 1(1), pages 125-150, June.

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