Credit Spreads and the Treasury Zero Coupon Spot Curve
AbstractThis paper examines the relationship between credit spreads on industrial bonds and the underlying Treasury term-structure. Unlike previous studies, we use zero-coupon spot rates, which eliminate coupon bias, and so allow for a consistent study both within and across the different credit ratings. As far as we are able to determine, we are the first to examine the stability of the relation between credit spreads and the Treasury term structure. We find that the level and the slope of the Treasury term structure are negatively correlated with the spread on corporate bonds. Importantly, the effect of the level and slope of the Treasury yield curve on credit spreads are reasonably constant through time. This is good news for value-at-risk calculations as this suggests that the correlation amongst assets of different credit classes are stable, so use of historic correlations to model spread relations maybe valid.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-06.
Length: 38 pages
Date of creation: Aug 2001
Date of revision: Jul 2002
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More information through EDIRC
Credit Spread; Coupon Bias; Value at Risk; Correlation;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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