Interest Rates, Stock Returns, and Credit Spreads: Evidence from German Eurobonds

25 Pages Posted: 12 Feb 2003

See all articles by Niklas Wagner

Niklas Wagner

Passau University

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics

Jonathan A. Batten

RMIT University

Date Written: January 2005

Abstract

We investigate daily variations in credit spreads on investment grade Deutschemark-denominated Eurobonds during the challenging 1994 to 1998 period. Empirical results from a Longstaff and Schwartz (1995) two-factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity and interpret this as consistent with portfolio rebalancing activities (where long maturity high quality bonds are sold for stocks) or with factor risk premiums on corporate bonds, which may temporarily dominate default risk.

Keywords: Credit spreads, bond ratings, spread prediction

JEL Classification: G14, G15

Suggested Citation

Wagner, Niklas F. and Hogan, Warren P. and Batten, Jonathan A., Interest Rates, Stock Returns, and Credit Spreads: Evidence from German Eurobonds (January 2005). Available at SSRN: https://ssrn.com/abstract=552682 or http://dx.doi.org/10.2139/ssrn.552682

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 7730 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=91

Jonathan A. Batten

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

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