Download or read book A New Take on the Relationship Between Interest Rates and Credit Spreads written by Brice V. Dupoyet and published by . This book was released on 2019 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We revisit the link between interest rates and corporate bond credit spreads by applying Rigobon's (2003) heteroskedasticity identification methodology to their interconnected dynamics through a bivariate VAR system. This novel approach allows us to account for endogeneity issues and to use this framework to test the various possible explanations for the credit spread - interest rate relation that have been proposed by the literature over the years. This innovative methodology allows us to conclude that credit spreads do indeed respond negatively to interest rates, yet that this negative relation is surprisingly robust to macroeconomic shocks, interest rates characteristics, different volatility regimes, and bond ratings. We also find the magnitude of the negative relation to be larger for high-yield bonds than for investment-grade bonds. Additionally, we are also able to rule out business cycles, the optionlike feature of callable bonds proposed by Duffee (1998), as well as the term spread as the main drivers of the negative nature of the relationship.

Download or read book Interest Rates and Credit Spread Dynamics written by Robert Neal and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses cointegration to model the time-series of corporate and government bond rates. We show that corporate rates are cointegrated with government rates and the relation between credit spreads and Treasury rates depends on the time horizon. In the short-run, an increase in Treasury rates causes credit spreads to narrow. This effect is reversed over the long-run and higher rates cause spreads to widen. These results imply a dynamic process for credit spreads that is not captured in existing models for pricing corporate bonds or measuring their interest rate sensitivity.

Download or read book Treasury Yields and Credit Spread Dynamics written by Dimitris A. Georgoutsos and published by . This book was released on 2015 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to shed new light on the conflicting empirical evidence on the relationship between credit spreads and Treasury rates. Following a general-to-specific modelling approach, we were unable to accept the presence of a long-run relationship between Baa credit spreads and long-term Treasury rates. At the same time, and in support of the structural models on credit risk modelling, a negative short-run relationship was obtained by means of impulse response functions. Subsequently, by employing a regime-switching estimation technique, we were able to establish the importance of the Treasury yield curve slope for the Baa credit spread determination in periods characterized by low interest rate volatility. Finally, we were able to provide evidence of an asymmetric response of the Baa credit spread to term spread changes according to the source of these changes, i.e. short or long term Treasury rates.

Download or read book An Empirical Investigation of the Short Term Relationship between Interest Rate Risk and Credit Risk written by Christian Cech and published by . This book was released on 2007 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical results from several studies indicate that changes in interest rates and changes in credit spreads are negatively related in the short run. These findings are further investigated by examining the dependence structure between interest rate and credit risk factor changes that are computed from sovereign and corporate bond indices. Several copulas (Gaussian, Student t, BB1, and Frank copula) are calibrated and their goodness-of-fit is compared. No clear pattern of the dependence structure can be observed as it varies substantially with the duration and - concerning the credit risk factor changes - the rating of the obligors. The Student t copula's fit in terms of the AIC goodness-of-fit measure is superior to that of all other copulas. The null hypothesis of a specific copula being the true copula can be rejected for the Student t copula in the least cases. Additionally employing a likelihood-ratio test, the null hypothesis of a Gaussian copula can be rejected in favour of a Student t copula. The Gaussian copula seems to underestimate the probability of joint strong risk factor changes, while the Student t copula seems to overestimate it.

Download or read book Credit Spreads on Sterling Corporate Bonds and the Term Structure of UK Interest Rates written by Jeremy Leake and published by . This book was released on 2005 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the relationship between credit spreads on sterling corporate bonds and the term structure of UK interest rates. In particular, it examines whether credit spreads are a reliable indicator of corporate bond default risk. Using daily price quotes from 1990 to 1998, the paper finds a small negative relationship between credit spreads on sterling investment-grade corporate bonds and the level and slope of the term structure of UK interest rates. The results are weaker than those found by Longstaff and Schwartz (1995) and Duffee (1996 and 1998) who both examine the relationship between US corporate bond credit spreads and the term structure of US interest rates. The weak relationship found suggests that credit spreads on sterling investment-grade corporate bonds have been driven by factors other than default risk. If so, we should be cautious in interpreting such credit spreads as measures of bond default risk. This result is important to both those in the field of financial stability interested in leading indicators of corporate defaults, and to monetary policy makers interested in the impact of interest rate changes on corporate bond default risk. Similar work should be repeated for sterling sub investment-grade corporate bonds once a sufficiently large data set can be assembled.

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Are Credit Spreads and Interest Rates Co integrated written by Ulrich Pape and published by . This book was released on 2007 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Revisiting the Slope of the Credit Spread Curve written by David Lando and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The term structure of interest rates contains information about the market's expectations of the direction of future interest rates. Similarly, the term structure of credit spreads contains information about the market's perception of future credit spreads. The term structure of credit spreads is closely linked with conditional default probabilities and this link suggests a downward sloping term structure of credit spreads for high risk issuers, whose default probability conditional on survival is likely to decrease. This paper shows that for sufficiently low credit quality, as defined by the level of credit spreads, this holds true most of the time when spreads are taken from credit default swap (CDS) markets. We also discuss why CDS markets give a better way of analyzing this problem than bond price data.

Download or read book Credit Spreads and Interest Rates written by Charles Morris and published by . This book was released on 1998 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Floating Fixed Credit Spreads written by Darrell Duffie and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the term structure of yield spreads between floating-rate and fixed-rate notes of the same credit quality and maturity. Floating-fixed spreads are theoretically characterized in some practical cases and quantified in a simple model in terms of maturity, credit quality, yield volatility, yield-spread volatility, correlation between changes in yield spreads and default-free yields, and other determining variables. We show that if the issuer's default risk is risk-neutrally independent of interest rates, the sign of floating-fixed spreads is determined by the term structure of the risk-free forward rate.

Download or read book Credit Spreads and the Term Structure of Interest Rates written by Charlotte Christiansen and published by . This book was released on 2000 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Simple Approach to Valuing Risky Fixed and Floating Rate Debt and Determining Swap Spreads written by Francis A. Longstaff and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a simple approach to valuing risky corporate debt that incorporates both default and interest-rate risk. We use this approach to derive simple closed-form valuation expressions for fixed and floating rate debt. The model provides a number of interesting new insights about pricing and hedging corporate debt securities. For example, we find that the correlation between default risk and the interest rate has a significant effect on the properties of the credit spread. We also use this approach to derive interest-rate swap rates when one or both counter-parties may default. Using Moody's corporate bond yield data, we find that credit spreads are negatively related to interest rates and that durations of risky bonds depend on the correlation with interest rates. This empirical evidence is consistent with the implications of the valuation model.

Download or read book US Banking Deregulation Small Businesses and Interstate Insurance of Personal Income written by Yuliya Demyanyk and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Can Liquidity Risk be Subsumed in Credit Risk written by Henri Pagès and published by . This book was released on 2001 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Relationship Between Issuance Spreads and Credit Performance of Structured Finance Securities written by Jian Hu and published by . This book was released on 2007 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: This Special Comment analyzes the relationship between structured finance par coupon spreads at issuance and the securities' credit ratings. Our data sample covers a seven-year period from 1998 to 2004, and includes floating and fixed rate securities that were rated investment grade (Baa3 or above) at origination.The major findings are:ʼn Spreads vary as expected across rating categories, with spreads on lower rated securities considerably higher than spreads on higher rated securities.ʼn Spreads vary substantially over time and across asset classes; the spreads on structured finance securities are generally wider than those on similarly rated corporate securities.ʼn Spreads in structured finance are generally positively correlated with those in corporate finance. The correlations appear to vary by rating category and asset class.ʼn Spreads typically widen when the structured finance one-year speculative-grade impairment rate or corporate one-year speculative-grade default rate rises. Spreads also vary with the three-month LIBOR rate and the slope of the swap rate curve.ʼn Spreads are backward looking in the sense that new issue spreads widen after downgrade rates rise on outstanding securities within the same asset class.ʼn Spreads also anticipate future credit performance in the sense that securities with wider spreads at issuance (conditional on sector, rating, and general market conditions) are more likely to experience subsequent rating downgrades than other securities.ʼn A number of important simplifying assumptions are used to facilitate the analysis. In particular, all fixed rate spreads are measured by comparing each tranche's par coupon rate to the five-year swap rate, regardless of the security's expected average life. Moreover, all floating rate spreads are expressed as spreads over three-month LIBOR rates, by adjusting for the prevailing difference between the security's benchmark interest rate and the three-month rate. We believe that a relaxation of these assumptions would not change any of the conclusions stated above. In future studies, however, we hope to use better spread measures and carefully account for differences in average lives and differences in benchmark interest rates across securities.

Download or read book Valuing credit spread options under stochastic volatility interest rates written by Theophilus Harry Samuel Boafo-Yirenkyi and published by . This book was released on 2003 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Analysis of Emerging Markets Sovereign Credit Spreads written by Marco S. Matsumura and published by . This book was released on 2005 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: