Credit Spreads and the Term Structure of Interest Rates
Department of Finance, The Aarhus School of Business
22 Pages Posted: 16 Oct 2000
Date Written: July 2000
This paper analyzes the impact of macroeconomic announcements on the correlation between credit spreads and the term structure of interest rates. We propose to employ an extended version of the Constant Conditional Correlations framework of Bollerslev (1990) to describe the evolution of the first difference of the credit spread, the first difference of the level of the term structure, and the first difference of the slope of the term structure. Our main empirical findings can be summarized as follows: (a) The credit spread and the level of the term structure are uncorrelated on macroeconomic announcement days. (b) The credit spread and the level of the term structure are negatively correlated. (c) The credit spread and the slope of the term structure are negatively correlated. (d) The process for the conditional variance of the credit spread is highly persistent. (e) The conditional variance of the credit spread is smaller on macroeconomic announcement days than on other days. The results, (a) in particular, provide important new information about how corporate bond asset pricing models should be specified.
JEL Classification: C32, G12, G14
Suggested Citation: Suggested Citation