An Empirical Investigation in Credit Spread Indices
AbstractWe study the dynamics of the spread between U.S. corporate and Treasury bonds. We focus on Aaa and Baa corporate yield indices and estimate nonparametrically the dynamics of the spreads assuming that they follow a univariate diffusion process. Using techniques developed for interest rate processes we try to infer from the data what acceptable process can be used to model aggregate credit spreads for option pricing or risk management purposes. We find that there is significant evidence of mean reversion especially for higher rated spreads and that the volatility of Aaa spreads exhibit a U-shape while the volatility of Baa spreads is monotonically increasing in the level of spreads. Based on these observations and on the evidence of jumps in the series, we propose a new model for credit spread indices (an Ornstein-Uhlenbeck with jumps) and estimate it by maximum likelihood.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2000028.
Date of creation: 01 Sep 2000
Date of revision:
Credit spread; risk management; jump diffusion; volatility; nonparametric;
Other versions of this item:
- Jean -Luc Prigent & Olivier Renault & Olivier Scaillet, 2000. "An Empirical Investigation in Credit Spread Indices," Working Papers, Centre de Recherche en Economie et Statistique 2000-59, Centre de Recherche en Economie et Statistique.
- Olivier Scaillet & Olivier Renault & Jean-Luc Prigent, 2000. "An Empirical Investigation in Credit Spread Indices," FMG Discussion Papers, Financial Markets Group dp363, Financial Markets Group.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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- Carl Chiarella & Christina Nikitopoulos Sklibosios & Erik Schlögl, 2007.
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