 Corporate yield spreads and real interest ratesJonathan Batten, Gady Jacoby and Rose C. Liao International Review of Financial Analysis, 2014, vol. 34, issue C, 89-100 Abstract: The effect of inflation on the credit spreads of corporate bonds is investigated utilising real instead of nominal interest rates in extensions of the models proposed by Longstaff and Schwartz (1995) and Collin-Dufresne et al. (2001). Inflation is a critical, non-default, component incorporated in nominal bond yields, whose effect has not been considered by existing credit spread theory. In this sense the only true test of models of credit spread pricing must utilise real rates. To illustrate these requirements the Canadian bond data of Jacoby, Liao, and Batten (2009) is utilised. This Canadian data accommodates callability and the tax effects otherwise present in U.S. bond markets. The relation with historical default rates of both U.S. and Canadian bonds is also investigated since this approach is clean of both callability and tax effects. Overall, the analysis provides additional insights into the theoretical drivers of credit spreads as well as helping to explain observed corporate bond yield behaviour in financial markets. Keywords: Credit spreads; Corporate bonds; Real interest rates; Reduced-form models; Structural models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:34:y:2014:i:c:p:89-100 DOI: 10.1016/j.irfa.2014.05.009 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.