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Credit Spreads and the Treasury Zero Coupon Spot Curve

Author

Listed:
  • Frank Skinner

    () (ICMA Centre, University of Reading)

  • Nicholas Papageorgiou

    (HEC Montreal, Canada)

Abstract

This paper examines the relationship between credit spreads on industrial bonds and the underlying Treasury term-structure. Unlike previous studies, we use zero-coupon spot rates, which eliminate coupon bias, and so allow for a consistent study both within and across the different credit ratings. As far as we are able to determine, we are the first to examine the stability of the relation between credit spreads and the Treasury term structure. We find that the level and the slope of the Treasury term structure are negatively correlated with the spread on corporate bonds. Importantly, the effect of the level and slope of the Treasury yield curve on credit spreads are reasonably constant through time. This is good news for value-at-risk calculations as this suggests that the correlation amongst assets of different credit classes are stable, so use of historic correlations to model spread relations maybe valid.

Suggested Citation

  • Frank Skinner & Nicholas Papageorgiou, 2001. "Credit Spreads and the Treasury Zero Coupon Spot Curve," ICMA Centre Discussion Papers in Finance icma-dp2001-06, Henley Business School, Reading University, revised Jul 2002.
  • Handle: RePEc:rdg:icmadp:icma-dp2001-06
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2001-06.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit Spread; Coupon Bias; Value at Risk; Correlation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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