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Author: Antje Berndt
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Author: Antje Berndt
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Author: Patrick Houweling
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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We present a new framework for the joint estimation of the default-free term structure of interest rates and corporate credit spread curves. It specifies the discount curve of a specific credit rating class as the sum of the government discount function and a discount spread function. Both functions are modelled using splines so that we can jointly estimate the default-free government term structure and corporate credit spread curves with least squares. We construct confidence intervals around the estimated term structures and credit spreads and use them to determine the number of knots and the order of the involved spline functions. By using a high-quality data set of German mark denominated bonds, we show that the new framework yields more realistic spreads than conventionally obtained spread curves that result from subtracting independently estimated government and corporate term structures. The estimated spread curves are now smooth functions of time to maturity, as opposed to the twisting curves one gets from the traditional method, and are less sensitive to model specifications. Moreover, the implied corporate term structures have tighter confidence bands. The credit spreads and term structures that result from the framework are therefore more suited to be used as input to, e.g., models that asses the credit risk in derivatives, pricing models for credit derivatives and corporate bonds, risk management procedures, and time series analyses of credit spreads.
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Languages : en
Pages :
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We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated corporate bonds in a doubly- stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables - indicators of real activity, inflation and financial conditions - as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs"!as a forward-looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs"!across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher- rated bonds.
Author: Jeffery D. Amato
Publisher:
ISBN:
Category : Corporate bonds
Languages : en
Pages : 72
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Book Description
We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables -- indicators of real activity, inflation and financial conditions -- as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs as a forward--looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher-rated bonds.
Author: Zhiping Zhou
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We estimate a no-arbitrage term structure model of U.S. Treasury yields and corporate bond spreads with both economic factors and latent factors as drivers of term structure dynamics. We consider two sets of economic factors: macro factors consisting of inflation and real activity, and financial market factors consisting of funding liquidity and market volatility. We show that financial market factors have limited effects on the Treasury yield curve but substantial impacts on the credit spread term structure. In particular, negative liquidity shocks widen credit spreads, and this effect is more pronounced for short-term corporate bonds. We also find that out-of-sample forecasts for credit spreads improve when financial market factors are incorporated and when no-arbitrage restrictions are imposed. We also propose a minimum-chi-square method for estimating the term structure models of interest rate and credit spreads, which is more efficient and accurate than the widespread maximum-likelihood estimation.
Author: Rainer Jankowitsch
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
The traditional method of credit spread estimation is based on subtracting independently estimated risk-free and risky term structures of interest rates which in many cases yields unrealistically shaped and often irregular credit spread curves. A parsimonious joint estimation of the risk-free term structure and the credit spread as proposed by Houweling et al. (2001) might serve as a valuable alternative to overcome this drawback but it is hard to decide whether a seemingly irregular shape of the credit spread curve is economically caused by the data or is only an artefact of the functional form of the estimation model. Results of an empirical examination of EMU government bond data show that traditional estimation models with different functional forms yield differing irregularities in the credit spread curves whereas joint estimation procedures result in well-behaving and coinciding curves. Moreover, the explanatory power of the more parsimonious joint estimation procedures is virtually equal to the traditional methods. This is strong evidence for the superiority of a joint estimation procedure of credit spread curves. Finally, we conclude that a simple linear joint cubic splines specification performs surprisingly well compared to a numerically more affording non-linear model.
Author: Sebastian Wilde
Publisher: GRIN Verlag
ISBN: 334670761X
Category : Business & Economics
Languages : en
Pages : 79
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Master's Thesis from the year 2022 in the subject Economics - Finance, grade: 1,7, University of Hagen (Fakultät für Wirtschaftswissenschaft, Lehrstuhl für Bank- und Finanzwirtschaft), language: English, abstract: Corporate bond credit spreads are much larger than historical default rates, which leads to an unexplained gap between the default premium component and total credit spread. This gap is referred to as the "credit spread puzzle" in the literature and has driven the discussion of the components of credit spreads in the past decades. The size of each component affects the decision of whether to purchase a particular class of bonds; this underlines its importance in risk management, portfolio management, and valuation. The first goal of the thesis is to provide a comprehensive review of the current state of research on how to decompose credit spreads and estimate their parts. Second, in an empirical study, the systematic risk in current EUR-denominated credit spreads is estimated and compared to the results of Elton et al. (2001). Furthermore, I analyze the regime-dependence of credit spreads for different cross-sections, as systematic risk has proven important in crisis periods. Finally, implications for the calculation of debt beta are derived as in business valuations it is possible to use a debt beta if the debt of the valuation object is subject to a systematic risk that leads to a signifcant risk premium demanded by debt providers. I show that the systematic part of the credit spread for observed EUR-denominated bond spreads from 2009 to 2021 can be assumed higher than in the US bond market, is regime-dependent and would have direct implications on the calculation and relevance of a debt beta for business valuations.
Author: Liuren Wu
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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This paper presents an internally consistent analysis of the economic determinants of the term structure of credit spreads across different credit rating classes and industry sectors. Our analysis proceeds in two steps. First, we extract three economic factors from 13 time series that capture three major dimensions of the economy: inflation pressure, real output growth, and financial market volatility. In the second step, we build a no-arbitrage model that links the dynamics and market prices of these fundamental sources of economic risks to the term structure of Treasury yields and corporate bond credit spreads. Via model estimation, we infer the market pricing of these economic factors and their impacts on the whole term structure of Treasury yields and credit spreads.Estimation shows that positive inflation shocks increase both Treasury yields and credit spreads across all maturities and credit rating classes. Positive shocks on the real output growth also increase the Treasury yields, more so at short maturities than at long maturities. The impacts on the credit spreads are positive for high credit rating classes, but become negative and increasingly so at lower credit rating classes. The financial market volatility factor has small positive impacts on the Treasury yield curve, but the impacts are strongly positive on the credit spreads, and increasingly so at longer maturities and lower credit rating classes.Finally, when we divide each rating class into two industry sectors: financial and corporate, we find that with in each rating class, the credit spreads in the financial sector are on average wider and more volatile than the spreads in the corporate sector. Estimation further shows that the term structure of credit spreads in the financial sector is more responsive to shocks in the economic factors.
Author: Patrick Houweling
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Fan Yu
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Theory predicts that the quality of a firm's information disclosure can affect the term structure of its corporate bond yield spreads. Using cross-sectional regression and Nelson-Siegel yield curve estimation, I find that firms with higher AIMR disclosure rankings tend to have lower credit spreads. Moreover, this ``transparency spread'' is especially large among short-term bonds. These findings are consistent with the theory of discretionary disclosure as well as the incomplete accounting information model of Duffie and Lando (2001). The presence of a sizable short-term transparency spread can attenuate some of the empirical problems associated with structural credit risk models.
