Credit Spreads and the Treasury Zero Coupon Spot Curve

Frank Skinner () and Nicholas Papageorgiou
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Frank Skinner: ICMA Centre, University of Reading
Nicholas Papageorgiou: HEC Montreal, Canada

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This paper examines the relationship between credit spreads on industrial bonds and the underlying Treasury term-structure. Unlike previous studies, we use zero-coupon spot rates, which eliminate coupon bias, and so allow for a consistent study both within and across the different credit ratings. As far as we are able to determine, we are the first to examine the stability of the relation between credit spreads and the Treasury term structure. We find that the level and the slope of the Treasury term structure are negatively correlated with the spread on corporate bonds. Importantly, the effect of the level and slope of the Treasury yield curve on credit spreads are reasonably constant through time. This is good news for value-at-risk calculations as this suggests that the correlation amongst assets of different credit classes are stable, so use of historic correlations to model spread relations maybe valid.

Keywords: Credit Spread; Coupon Bias; Value at Risk; Correlation (search for similar items in EconPapers)
JEL-codes: G21 G24 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2001-08, Revised 2002-07
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