The Joint Estimation of Term Structures and Credit Spreads
AbstractWe present a new framework for the joint estimation of the default-free government term structure and corporate credit spread curves. By using a data set of liquid, German mark denominated bonds, we show that this yields more realistic spreads than traditionally obtained spread curves that result from subtracting independently estimated government and corporate term structures. The obtained spread curves are smooth functions of time to maturity, as opposed to the twisting curves one gets from the traditional method, and are less sensitive to model specifications. To determine the ‘optimal’ model specification, we use a newly developed test statistic that compares spread curves from competing models. This discussion paper has resulted in a publication in the Journal of Empirical Finance , 2001, 8(3), 297-323.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-027/4.
Date of creation: 14 Apr 1999
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Web page: http://www.tinbergen.nl
Term structure estimation; Credit spreads; Corporate bonds; Splines;
Other versions of this item:
- Houweling, Patrick & Hoek, Jaap & Kleibergen, Frank, 2001. "The joint estimation of term structures and credit spreads," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 297-323, July.
- Houweling, P. & Hoek, J. & Kleibergen, F.R., 1999. "The Joint Estimation of Term Structures and Credit Spreads," Econometric Institute Research Papers EI 9916-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-05-10 (All new papers)
- NEP-ETS-1999-05-10 (Econometric Time Series)
- NEP-FIN-1999-05-10 (Finance)
- NEP-MON-1999-05-10 (Monetary Economics)
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