Credit Spread Curves and Credit Ratings

47 Pages Posted: 11 Aug 2000

See all articles by Jia He

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance

Wenwei Hu

Shanghai University of Engineering Science; Shanghai University - School of Management

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: undated

Abstract

We develop a bond pair approach to study (1) the shapes (slope and curvature) of individual spread curves, and (2) the relationship among spread curves for bonds with different ratings. We uncover downward sloping spread curves for triple C and double C bonds and upward sloping spread curves for triple A+ and triple A bonds. We also uncover hump-shaped spread curves for middle graded bonds including double A to single B and there exist peak points on these spread curves. We document the relationship among spread curves for bonds with different ratings in terms of time to peak and peak spread. We conclude that, in a comparison of higher rated bonds (say, double A) with lower rated bonds (say, single B), the credit spread is higher and time to peak is shorter for lower rated bonds than for higher rated bonds. In particular, these hump-shaped curves are bounded from above by downward sloping spread curves for triple C and double C bonds and bounded from below by upward sloping spread curves for triple A+ and triple A bonds.

JEL Classification: G12

Suggested Citation

He, Jia and Hu, Wenwei and Lang, Hsien Ping Larry, Credit Spread Curves and Credit Ratings (undated). Available at SSRN: https://ssrn.com/abstract=224393 or http://dx.doi.org/10.2139/ssrn.224393

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+882 2609 8568 (Phone)

Wenwei Hu

Shanghai University of Engineering Science

shanghai, 201620
China

Shanghai University - School of Management

102/204,1390 Shangda Rd
Shanghai, 200444
China

Hsien Ping Larry Lang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

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