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The Term Structure of Credit Spreads on Euro Corporate Bonds

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  • Landschoot, A. van

    (Tilburg University, Center for Economic Research)

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    Abstract

    Although there is a broad literature on structural credit risk models, there has been little empirical testing of these models.In this paper we examine the term structure of credit spreads on euro corporate bonds and the empirical validation of structural credit risk models.The latter provide a framework to analyze the main determinents of credit spreads.Using a dataset of 1577 investment grade corporate and 250 AAA rated government bonds, we first estimate the term structure of credit spreads for di.erent (sub)rating categories with an extension of the Nelson-Siegel method.Within each rating category, credit spreads on plus rated bonds have significantly higher credit spreads than minus rated bonds.According to the structural models, the results indicate that credit spread changes are significantly negatively correlated with changes in the level and the slope of the default-free term structure.While changes in the slope a.ect all rating categories, changes in the level are more important for higher rated bonds (AAA and AA).The stock return and the implied volatility of the stock price seem to significantly influence credit spread changes.The lower the rating category and the longer the maturity of the bond the stronger both e.ects.For BBB rated bonds, changes in liquidity -measured as the bid-ask spread- significantly influence credit spread changes.Higher rated bonds (AAA and AA) are also driven by past credit spread changes.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-046.

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    Date of creation: 2003
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    Handle: RePEc:dgr:kubcen:2003046

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    Related research

    Keywords: capital markets; risk management; bonds; volatility; credit risk;

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    References

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    Cited by:
    1. Astrid Landschoot, 2004. "Sovereign credit spreads and the composition of the government budget," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(3), pages 510-524, September.
    2. Carolina Castagnetti & Eduardo Rossi, 2013. "Euro Corporate Bond Risk Factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 372-391, 04.
    3. Hoi Wong & Tsz Wong, 2007. "Reduced-form Models with Regime Switching: An Empirical Analysis for Corporate Bonds," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 229-253, September.
    4. Gann, Philipp & Laut, Amelie, 2008. "Einflussfaktoren auf den Credit Spread von Unternehmensanleihen," Discussion Papers in Business Administration 4231, University of Munich, Munich School of Management.

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