Measuring credit spreads: evidence from Australian Eurobonds
Recent theoretical models including the closed-form valuation model of Longstaff and Schwartz (1995) predict that credit spreads are driven by both an asset and interest rate factor. In empirical studies the credit spread may be expressed as either the difference between, or ratio of, the risky bond to a riskless bond. Using a daily sample of non-callable Australian dollar denominated Eurobonds it is found, consistent with theory, that changes in credit spreads are negatively related to both changes in the return on All Ordinaries stock Index and changes in the Government bond yield. Interestingly, the ratio measure - termed a relative credit spread - tends to be statistically more significant than the alternate measure based upon the difference - termed an actual credit spread. However, it is shown that this result is spurious and due to the way in which relative credit spreads are constructed. Noting Duffee's (1998) warning against using callable bonds, the use of only non-callable Eurobonds provides a cleaner result when compared with tests conducted by Longstaff and Schwartz (1995).
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 15 (2005)
Issue (Month): 9 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAFE20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAFE20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ning Li & David. Ayling & Lynn Hodgkinson, 2003. "An examination of the information role of the yield spread and stock returns for predicting future GDP," Applied Financial Economics, Taylor & Francis Journals, vol. 13(8), pages 593-597.
- Barnhill Jr., Theodore M. & Maxwell, William F., 2002. "Modeling correlated market and credit risk in fixed income portfolios," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 347-374, March.
- Madan, Dilip & Unal, Haluk, 2000. "A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 43-65, March.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
- Christiansen, Charlotte, 2002.
"Credit spreads and the term structure of interest rates,"
International Review of Financial Analysis,
Elsevier, vol. 11(3), pages 279-295.
- Christiansen, Charlotte, 2000. "Credit Spreads and the Term Structure of Interest Rates," Finance Working Papers 00-14, University of Aarhus, Aarhus School of Business, Department of Business Studies.
- Jean Helwege & Christopher M. Turner, 1999. "The Slope of the Credit Yield Curve for Speculative-Grade Issuers," Journal of Finance, American Finance Association, vol. 54(5), pages 1869-1884, October.
- Gregory R. Duffee, 1996.
"Estimating the price of default risk,"
Finance and Economics Discussion Series
96-29, Board of Governors of the Federal Reserve System (U.S.).
- Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
- Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
- Batten, Jonathan A. & Hogan, Warren P., 2003. "Time variation in the credit spreads on Australian Eurobonds," Pacific-Basin Finance Journal, Elsevier, vol. 11(1), pages 81-99, January.
- George Athanassakos & Peter Carayannopoulos, 2001. "An empirical analysis of the relationship of bond yield spreads and macro economic factors," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 197-207.
- S. K. Bhaumik & D. Coondoo, 2003. "Econometrics of yield spreads in the money market: a note," Applied Financial Economics, Taylor & Francis Journals, vol. 13(9), pages 645-653.
- Barnhill Jr., Theodore M. & Joutz, Frederick L. & Maxwell, William F., 2000. "Factors affecting the yields on noninvestment grade bond indices: a cointegration analysis," Journal of Empirical Finance, Elsevier, vol. 7(1), pages 57-86, May.
- Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:15:y:2005:i:9:p:651-666. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.