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The dynamics of rating based credit benchmark curves

Thomas Heidorn and Sara Schlamann

No 231, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: The paper models and analyses the dynamics of credit spread curves based on ratings over the period from 2004 to 2021. Using more than 1.5 million data points of individual bonds, instead of using index data, monthly asset swap spread (ASW) curves are constructed for all rating levels. The paper focuses on the EUR credit market which has grown significantly in recent years. Also, the data is more contemporary compared to the literature. For a period of almost 20 years EUR corporate bonds (investment grade and high yield) are discussed. We find that investment grade ASW curves are typically upward sloping, however during time of crisis they turn hump shaped or inverse. Non-investment grade curves tend to be inverse. While most rating classes show substantial rating changes during crises, very low rated bonds seem to depend mainly on idiosyncratic risk. We find that the bond purchase programs by central banks considerably lowered credit spreads. Also, the credit spread for lower ratings are typically higher for the whole curve compared to a better rating. By comparing ratingbased credit spread curves with individual curves we find that they are suitable as a benchmark.

Keywords: Credit Spread Curves; Benchmark Curves; Asset Swap Spread; Credit Rating and Credit Spread; Credit Spread Development; Rating Benchmark Curves; Credit Spread (search for similar items in EconPapers)
JEL-codes: G11 G24 G32 Q56 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-dem
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