Interest Rates and Credit Spread Dynamics

Posted: 20 May 2019

See all articles by Robert Neal

Robert Neal

Indiana University - Kelley School of Business

Douglas S. Rolph

City University of Hong Kong

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Charles Morris

Federal Reserve Bank of Kansas City

Date Written: December 2000

Abstract

This paper uses cointegration to model the time-series of corporate and government bond rates. We show that corporate rates are cointegrated with government rates and the relation between credit spreads and Treasury rates depends on the time horizon. In the short-run, an increase in Treasury rates causes credit spreads to narrow. This effect is reversed over the long-run and higher rates cause spreads to widen. These results imply a dynamic process for credit spreads that is not captured in existing models for pricing corporate bonds or measuring their interest rate sensitivity.

Note: Previously titled "Credit Spreads and Interest Rates: A Cointegration Approach"

Suggested Citation

Neal, Robert and Rolph, Douglas S. and Dupoyet, Brice and Morris, Charles, Interest Rates and Credit Spread Dynamics (December 2000). AFA 2001 New Orleans. Available at SSRN: https://ssrn.com/abstract=249983 or http://dx.doi.org/10.2139/ssrn.249983

Robert Neal (Contact Author)

Indiana University - Kelley School of Business ( email )

801 W. Michigan
Indianapolis, IN 46202
United States
317-274-3348 (Phone)
317-274-3312 (Fax)

Douglas S. Rolph

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Brice Dupoyet

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

Charles Morris

Federal Reserve Bank of Kansas City

1 Memorial Drive
Kansas City, MO 64198
United States

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