The Joint Estimation of Term Structures and Credit Spreads

25 Pages Posted: 27 Apr 1999

See all articles by Patrick Houweling

Patrick Houweling

Robeco Investment Research

Frank R. Kleibergen

University of Amsterdam - Department of Quantitative Economics (KE)

Jaap Hoek

Robeco Asset Management


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.

JEL Classification: G12, C13

Suggested Citation

Houweling, Patrick and Kleibergen, Frank R. and Hoek, Jaap, The Joint Estimation of Term Structures and Credit Spreads. Journal of Empirical Finance, Vol. 8, No. 3, pp. 297-323, 2001, Available at SSRN: or

Patrick Houweling (Contact Author)

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
+31-10-2243538 (Phone)


Frank R. Kleibergen

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB

Jaap Hoek

Robeco Asset Management ( email )

Rotterdam, 3011 AG

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