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The Slope Of The Term Structure Of Credit Spreads: An Empirical Investigation

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  • Mascia Bedendo
  • Lara Cathcart
  • Lina El-Jahel

Abstract

In this article we analyze the slope of the term structure of credit spreads. We investigate the explanatory role of interest rate, market, and idiosyncratic equity variables that the recent empirical literature highlights as important determinants of credit spread levels. This study extends the analysis and assesses its effect on credit slopes for a sample of corporate bonds. We find that these factors affect credit spreads at short and long maturities in a significantly different way. A closer inspection of the credit spread slope also reveals that it is a useful indicator of the direction of changes in future short-term credit spreads. This evidence has important implications for the trading and risk management of portfolios of bonds with different maturities. 2007 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Mascia Bedendo & Lara Cathcart & Lina El-Jahel, 2007. "The Slope Of The Term Structure Of Credit Spreads: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(2), pages 237-257.
  • Handle: RePEc:bla:jfnres:v:30:y:2007:i:2:p:237-257
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    References listed on IDEAS

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    1. Christiansen, Charlotte & Lund, Jesper, 2002. "Revisiting the shape of the yield curve: the effect of interest rate volatility," Finance Working Papers 02-3, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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    Cited by:

    1. Lara Cathcart & Lina El-Jahel, 2006. "Pricing defaultable bonds: a middle-way approach between structural and reduced-form models," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 243-253.
    2. Calice, Giovanni & Ioannidis, Christos & Miao, RongHui, 2016. "A Markov switching unobserved component analysis of the CDX index term premium," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 189-204.
    3. Marra, Miriam, 2015. "The impact of liquidity on senior credit index spreads during the subprime crisis," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 148-167.
    4. Nakashima, Kiyotaka & Saito, Makoto, 2009. "Credit spreads on corporate bonds and the macroeconomy in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 309-331, September.
    5. Antje Berndt & Peter Ritchken & Zhiqiang Sun, 2010. "On Correlation and Default Clustering in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2680-2729, July.
    6. Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos Sklibosios, 2013. "Credit Derivatives Pricing With Stochastic Volatility Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-28.
    7. Loncarski, Igor & Szilagyi, Peter G., 2012. "Empirical analysis of credit spread changes of US corporate bonds," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 12-19.
    8. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    9. repec:wsi:ijtafx:v:09:y:2006:i:01:n:s0219024906003445 is not listed on IDEAS
    10. Chebbi TAREK, 2008. "Rating And Other Factors Explaining The Corporate Credit Spread: Empirical Evidence From Tunisian Bond Market," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(4(6)_Wint).

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