Measuring credit spreads: evidence from Australian Eurobonds
Recent theoretical models including the closed- form valuation model ofLongstaff and Schwartz (1995) predict that credit spreads are driven byboth an asset and interest rate factor. In empirical studies the credit spreadmay be expressed as either the difference between, or ratio of, the riskybond to a riskless bond. Using a daily sample of non-callable Australiandollar denominated Eurobonds it is found, consistent with theory, thatchanges in credit spreads are negatively related to both changes in thereturn on All Ordinaries stock Index and changes in the Governmentbond yield. Interestingly, the ratio measure - termed a relative creditspread - tends to be statistically more significant than the alternate measurebased upon the difference - termed an actual credit spread. However,it is shown that this result is spurious and due to the way in which relativecredit spreads are constructed. Noting Duffee's (1998) warning againstusing callable bonds, the use or only non-callable Eurobonds provides acleaner result when compared with tests conducted by Longstaff andSchwartz (1995).
|Year of publication:||
|Authors:||Hogan Warren ; Batten Jonathan ; Jacoby Gady|
|Type of publication:||Other|
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