The Term Structure of Credit Spreads on Euro Corporate Bonds

A. van Landschoot

    Research output: Working paperDiscussion paperOther research output

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    Abstract

    Although there is a broad literature on structural credit risk models, there has been little empirical testing of these models.In this paper we examine the term structure of credit spreads on euro corporate bonds and the empirical validation of structural credit risk models.The latter provide a framework to analyze the main determinents of credit spreads.Using a dataset of 1577 investment grade corporate and 250 AAA rated government bonds, we first estimate the term structure of credit spreads for di.erent (sub)rating categories with an extension of the Nelson-Siegel method.Within each rating category, credit spreads on plus rated bonds have significantly higher credit spreads than minus rated bonds.According to the structural models, the results indicate that credit spread changes are significantly negatively correlated with changes in the level and the slope of the default-free term structure.While changes in the slope a.ect all rating categories, changes in the level are more important for higher rated bonds (AAA and AA).The stock return and the implied volatility of the stock price seem to significantly influence credit spread changes.The lower the rating category and the longer the maturity of the bond the stronger both e.ects.For BBB rated bonds, changes in liquidity -measured as the bid-ask spread- significantly influence credit spread changes.Higher rated bonds (AAA and AA) are also driven by past credit spread changes.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherCentER, Center for Economic Research
    Number of pages40
    Volume2003-046
    Publication statusPublished - 2003

    Publication series

    NameCentER Discussion Paper
    Volume2003-046

    Fingerprint

    Corporate bonds
    Credit spreads
    Term structure
    Rating
    Credit risk models
    Maturity
    Implied volatility
    Government bonds
    Structural model
    Stock prices
    Liquidity
    Stock returns
    Testing
    Bid/ask spread

    Keywords

    • capital markets
    • risk management
    • bonds
    • volatility
    • credit risk

    Cite this

    van Landschoot, A. (2003). The Term Structure of Credit Spreads on Euro Corporate Bonds. (CentER Discussion Paper; Vol. 2003-046). Tilburg: CentER, Center for Economic Research.
    van Landschoot, A. / The Term Structure of Credit Spreads on Euro Corporate Bonds. Tilburg : CentER, Center for Economic Research, 2003. (CentER Discussion Paper).
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    van Landschoot, A 2003 'The Term Structure of Credit Spreads on Euro Corporate Bonds' CentER Discussion Paper, vol. 2003-046, CentER, Center for Economic Research, Tilburg.

    The Term Structure of Credit Spreads on Euro Corporate Bonds. / van Landschoot, A.

    Tilburg : CentER, Center for Economic Research, 2003. (CentER Discussion Paper; Vol. 2003-046).

    Research output: Working paperDiscussion paperOther research output

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    AB - Although there is a broad literature on structural credit risk models, there has been little empirical testing of these models.In this paper we examine the term structure of credit spreads on euro corporate bonds and the empirical validation of structural credit risk models.The latter provide a framework to analyze the main determinents of credit spreads.Using a dataset of 1577 investment grade corporate and 250 AAA rated government bonds, we first estimate the term structure of credit spreads for di.erent (sub)rating categories with an extension of the Nelson-Siegel method.Within each rating category, credit spreads on plus rated bonds have significantly higher credit spreads than minus rated bonds.According to the structural models, the results indicate that credit spread changes are significantly negatively correlated with changes in the level and the slope of the default-free term structure.While changes in the slope a.ect all rating categories, changes in the level are more important for higher rated bonds (AAA and AA).The stock return and the implied volatility of the stock price seem to significantly influence credit spread changes.The lower the rating category and the longer the maturity of the bond the stronger both e.ects.For BBB rated bonds, changes in liquidity -measured as the bid-ask spread- significantly influence credit spread changes.Higher rated bonds (AAA and AA) are also driven by past credit spread changes.

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    van Landschoot A. The Term Structure of Credit Spreads on Euro Corporate Bonds. Tilburg: CentER, Center for Economic Research. 2003. (CentER Discussion Paper).