Author: Seung C. Ahn
Publisher:
ISBN:
Category :
Languages : en
Pages : 49
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Book Description
This paper provides a new approach to model the common variation in the term structure of credit spreads. The novelty is that common factors are extracted using canonical relations between credit spreads and observable economic variables. We show how these factors can be used to test if a given set of macroeconomic and financial variables is sufficient to capture all the systematic variation in response variables, such as credit spreads. We find that credit spread innovations are subject to three common factors, two strong factors and one weak factor, and they account for 49% of the total variation. The first strong factor is related to the contemporaneous state of the economy, the second represents expectations about future economic conditions, and the weak factor is mainly related to the error correction processes in short-term spreads.
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: Giovanni Barone-Adesi
Publisher: Springer
ISBN: 1137564865
Category : Business & Economics
Languages : en
Pages : 137
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Book Description
Where institutions and individuals averagely invest the majority of their assets in money-market and fixed-income instruments, interest rate risk management could be seen as the single most important global financial issue. However, the majority of the key techniques used by most investors were developed several decades ago, and the advantages of multi-factor models are not fully recognised by many researchers and practitioners. This book provides clear and practical insight into bond portfolios and portfolio management through key empirical analysis. The authors use extensive sets of empirical data to describe the value potentially added by more recent techniques to manage interest rate risk relative to traditional techniques and to present empirical evidence of such an added value. Beginning with a description of the simplest models and moving on to the most complex, the authors offer key recommendations for the future of rate risk management.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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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: Mascia Bedendo
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
In this empirical paper we investigate the role of interest rate, market and idiosyncratic equity variables in explaining the entire shape of the term structure of credit spreads. Recent empirical literature has highlighted the importance of these components as determinants of the credit spread levels. By analyzing portfolios of straight bonds for both the industrial and financial sectors across investment grade credit ratings, we find that these factors impact credit spread levels at various maturities in a significantly different way. Therefore we conclude that these variables represent important determinants not only of the level, but also of the slope and curvature of credit spread term structures. A closer inspection of the credit spread slope also reveals that it contains important information about future credit spreads, and provides useful insights into the theoretical predictions of the Merton (1974) model.
Author:
Publisher:
ISBN:
Category : Bonds
Languages : en
Pages :
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Author: Marco Sorge
Publisher:
ISBN:
Category : Credit
Languages : en
Pages : 72
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Author: Philippe Mueller
Publisher:
ISBN:
Category :
Languages : en
Pages : 72
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Book Description
This paper explores the transmission of credit conditions into the real economy. Specifically, I examine the forecasting power of the term structure of credit spreads for future GDP growth. I find that the whole term structure of credit spreads has predictive power, while the term structure of Treasury yields has none. Using a parsimonious macro-finance term structure model that captures the joint dynamics of GDP, inflation, Treasury yields and credit spreads, I decompose the spreads and identify the drivers of this transmission effect. I show that there is a pure credit component orthogonal to macroeconomic information that accounts for a large part of the forecasting power of credit spreads. The macro factors themselves also contribute to the predictive power, especially for long maturity spreads. Additional factors affecting Treasury yields and credit spreads are irrelevant for predicting future economic activity. The credit factor is highly correlated with the index of tighter loan standards, thus lending support to the existence of a transmission channel from borrowing conditions to the economy. Using data from 2006-2008, I capture the ongoing crisis, during which credit conditions have heavily tightened and I show that the model provides reasonably accurate out-of-sample predictions for this period. As of year-end 2008, the model predicts a contraction of -2% in real GDP growth for 2009, which is lower than comparable survey forecasts.
Author: Jeremy Leake
Publisher:
ISBN:
Category :
Languages : en
Pages : 22
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Book Description
This paper explores the relationship between credit spreads on sterling corporate bonds and the term structure of UK interest rates. In particular, it examines whether credit spreads are a reliable indicator of corporate bond default risk. Using daily price quotes from 1990 to 1998, the paper finds a small negative relationship between credit spreads on sterling investment-grade corporate bonds and the level and slope of the term structure of UK interest rates. The results are weaker than those found by Longstaff and Schwartz (1995) and Duffee (1996 and 1998) who both examine the relationship between US corporate bond credit spreads and the term structure of US interest rates. The weak relationship found suggests that credit spreads on sterling investment-grade corporate bonds have been driven by factors other than default risk. If so, we should be cautious in interpreting such credit spreads as measures of bond default risk. This result is important to both those in the field of financial stability interested in leading indicators of corporate defaults, and to monetary policy makers interested in the impact of interest rate changes on corporate bond default risk. Similar work should be repeated for sterling sub investment-grade corporate bonds once a sufficiently large data set can be assembled.
Author: Varqá Khadem
Publisher:
ISBN:
Category :
Languages : en
Pages :
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