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Credit Spreads And The Zero-Coupon Treasury Spot Curve

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  • Nicolas Papageorgiou
  • Frank S. Skinner

Abstract

We examine the relation between credit spreads on industrial bonds and the underlying Treasury term structure. We use zero-coupon spot rates to eliminate the coupon bias and to allow for a consistent study both within and across the different credit ratings. Our results indicate that the level and slope of the Treasury term structure are negatively correlated with changes in the credit spread on investment-grade corporate bonds. We also find that the relation between credit spreads and the Treasury term structure is relatively stable through time. This is good news for value-at-risk calculations, as this suggests that the correlations among assets of different credit classes are stable; therefore use of historic correlations to model spread relations can be valid. 2006 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Nicolas Papageorgiou & Frank S. Skinner, 2006. "Credit Spreads And The Zero-Coupon Treasury Spot Curve," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(3), pages 421-439.
  • Handle: RePEc:bla:jfnres:v:29:y:2006:i:3:p:421-439
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    Cited by:

    1. Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
    2. 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.
    3. Gann, Philipp, 2008. "Der Internal Capital Adequacy Assessment Process als regulatorischer Treiber eines aktiven Kreditportfoliomanagements," Discussion Papers in Business Administration 4831, University of Munich, Munich School of Management.
    4. Marcello Pericoli & Marco Taboga, 2015. "Decomposing euro area sovereign spreads: credit, liquidity and convenience," Temi di discussione (Economic working papers) 1021, Bank of Italy, Economic Research and International Relations Area.
    5. Kraft, Holger & Munk, Claus, 2007. "Bond durations: Corporates vs. Treasuries," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3720-3741, December.
    6. Ramaprasad Bhar & Nedim Handzic, 2011. "A Multifactor Model of Credit Spreads," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 18(1), pages 105-127, March.

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