Credit spreads and interest rates: a cointegration approach

Charles Morris, Robert Neal and Douglas Rolph ()

No 98-08, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: 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. The positive long-run relation between spreads and Treasuries is inconsistent with prominent models for pricing corporate bonds, analyzing capital structure, and measuring the interest rate sensitivity of corporate bonds.

Keywords: Credit; Interest rates (search for similar items in EconPapers)
Date: 1998
New Economics Papers: this item is included in nep-ets and nep-mon
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Citations: View citations in EconPapers (26)

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