An empirical investigation into credit spread indices

Jean-Luc Prigent, Olivier Renault and Olivier Scaillet

Journal of Risk

Abstract: ABSTRACT The authors study the dynamics of the spread between US corporate and Treasury bonds. They focus on Aaa and Baa corporate yield indices and estimate the dynamics of the spreads nonparametrically assuming that they follow a univariate diffusion process. Using techniques developed for interest rate processes, they attempt to infer from the data what acceptable process can be used to model aggregate credit spreads for option pricing or risk management purposes. It is found that there is significant evidence of mean reversion, especially for higher-rated spreads, and that the volatility of Aaa spreads exhibit a U-shape while the volatility of Baa spreads is monotonically increasing in the level of spreads. Based on these observations and on the evidence of jumps in the series, a new model is proposed for credit spread indices (an Ornstein-Uhlenbeck process with jumps) and estimated using maximum likelihood.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-risk/2161137/empirica ... redit-spread-indices (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:2161137

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine ().