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The Joint Estimation of Term Structures and Credit Spreads

Author

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  • Patrick Houweling

    (Erasmus University Rotterdam)

  • Jaap Hoek

    (Robeco Group)

  • Frank Kleibergen

    (Erasmus University Rotterdam)

Abstract

We 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.

Suggested Citation

  • Patrick Houweling & Jaap Hoek & Frank Kleibergen, 1999. "The Joint Estimation of Term Structures and Credit Spreads," Tinbergen Institute Discussion Papers 99-027/4, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:19990027
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    References listed on IDEAS

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    Cited by:

    1. Leo Krippner, 2003. "Modelling the Yield Curve with Orthonormalised Laguerre Polynomials: A Consistent Cross-Sectional and Inter-Temporal Approach," Working Papers in Economics 03/02, University of Waikato.
    2. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.
    3. Wagner, Stephan M. & Bode, Christoph & Koziol, Philipp, 2011. "Negative default dependence in supplier networks," International Journal of Production Economics, Elsevier, vol. 134(2), pages 398-406, December.
    4. Portes, Richard & Palladini, Giorgia, 2011. "Sovereign CDS and Bond Pricing Dynamics in the Euro-area," CEPR Discussion Papers 8651, C.E.P.R. Discussion Papers.
    5. Malliaropulos, Dimitris & Migiakis, Petros, 2018. "The re-pricing of sovereign risks following the Global Financial Crisis," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 39-56.
    6. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278.
    7. Albrecht, Peter, 2005. "Kreditrisiken - Modellierung und Management: Ein Überblick," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 1(2), pages 22-152.
    8. Frank Skinner & Michalis Ioannides, 2004. "FRS17 and the Sterling Doubles A Corporate Yield Curve," ICMA Centre Discussion Papers in Finance icma-dp2004-08, Henley Business School, University of Reading.
    9. Vijay A. Murik, 2013. "Bond pricing with a surface of zero coupon yields," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(2), pages 497-512, June.
    10. Wagner, Stephan M. & Bode, Christoph & Koziol, Philipp, 2009. "Supplier default dependencies: Empirical evidence from the automotive industry," European Journal of Operational Research, Elsevier, vol. 199(1), pages 150-161, November.
    11. Frank S. Skinner & Michalis Ioannides, 2005. ""FRS17" and the Sterling Double A Corporate Yield Curve," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 1141-1169.

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    More about this item

    Keywords

    Term structure estimation; Credit spreads; Corporate bonds; Splines;
    All these keywords.

    JEL classification:

    • 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

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