Credit Spreads and the Term Structure of Interest Rates
This paper analyzes the impact of macroeconomic announcements on the correlation between credit spreads and the term structure of interest rates. We propose to employ an extented version of the Constant Conditional Correlations framework of Bollerslev (1990) to describe the evolution of the first difference of the slope of the term structure. Our main empirical findings can be summarized as follow: (a) The credit spread and the level of the term structure are uncorrelated on macroeconomic announcement days. (b) The credit spread and the level of the term structure are negatively correlated. (c) The credit spread and the slope of the term structure are negatively correlated. (d) The process for the conditional variance of the credit spread is highly persistent. (e) The conditional variance of the credit spread is smaller on macroeconomic announcement days than on other days. The results, (a) in particular, provide important new information about how corporate bond asset pricing models should be specified.
|Date of creation:||01 Jul 2000|
|Date of revision:|
|Note:||Later published in International Review of Financial Analysis|
|Contact details of provider:|| Postal: |
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
More information through EDIRC
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.:
- Nunn, Kenneth P. & Hill, Joanne & Schneeweis, Thomas, 1986. "Corporate Bond Price Data Sources and Return/Risk Measurement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(02), pages 197-208, June.
- Sarig, Oded & Warga, Arthur, 1989. " Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1351-60, December.
- Chang, Eric C. & Huang, Roger D., 1990. "Time-Varying Return and Risk in the Corporate Bond Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 323-340, September.
- Engle, Robert F, 1998. "Macroeconomic Announcements and Volatility of Treasury Futures," University of California at San Diego, Economics Working Paper Series qt7rd4g3bk, Department of Economics, UC San Diego.
- Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
- Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
- Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
- 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.
- 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.
- Duffee, Gregory R, 1999.
"Estimating the Price of Default Risk,"
Review of Financial Studies,
Society for Financial Studies, vol. 12(1), pages 197-226.
- Rohan Christie-David & Mukesh Chaudhry, 1999. "Liquidity And Maturity Effects Around News Releases," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(1), pages 47-67, 03.
- Charles M. Jones & Owen Lamont & Robin Lumsdaine, 1996.
"Macroeconomic News and Bond Market Volatility,"
_005, Princeton University, Department of Economics.
- Wilson, Jack W & Jones, Charles P, 1990. "Is There a January Effect in Corporate Bond and Paper Returns?," The Financial Review, Eastern Finance Association, vol. 25(1), pages 55-79, February.
- Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
- 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.
- Lumsdaine, Robin L, 1995. "Finite-Sample Properties of the Maximum Likelihood Estimator in GARCH(1,1) and IGARCH(1,1) Models: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 1-10, January.
- Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
- Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
- 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.
- Pierre Collin-Dufresne & Robert S. Goldstein & Spencer J. Martin, 1999. "The Determinants of Credit Spreads Changes," GSIA Working Papers 2000-E13, Carnegie Mellon University, Tepper School of Business.
- Michael J. Fleming & Eli M. Remolona, 1997.
"What moves the bond market?,"
9706, Federal Reserve Bank of New York.
When requesting a correction, please mention this item's handle: RePEc:hhb:aarfin:2000_014. 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: (Helle Vinbaek Stenholt)
If references are entirely missing, you can add them using this form.