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Interest Rates, Stock Returns and Credit Spreads: Evidence from German Eurobonds

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  • Niklas Wagner
  • Warren Hogan
  • Jonathan Batten

Abstract

We investigate daily variations in credit spreads on investment-grade Deutschemark-denominated Eurobonds during the challenging 1994-1998 period. Empirical results from a Longstaff and Schwartz (1995) two-factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term-structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity. Tentative interpretations are portfolio-rebalancing activities or differing risk factor sensitivities on short- vs. long-maturity bonds. Copyright Banca Monte dei Paschi di Siena SpA, 2005

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Bibliographic Info

Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 34 (2005)
Issue (Month): 1 (02)
Pages: 35-50

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Handle: RePEc:bla:ecnote:v:34:y:2005:i:1:p:35-50

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Cited by:
  1. Aboura, Sofiane & Wagner, Niklas, 2008. "Systematic credit risk: CDX index correlation and extreme dependence," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/1039, Université Paris-Dauphine.

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