Credit Spreads and the Treasury Zero Coupon Spot Curve

34 Pages Posted: 29 Apr 2005 Last revised: 28 Oct 2011

See all articles by Nicolas A. Papageorgiou

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance

Frank S. Skinner

Brunel University

Abstract

We examine the relation between credit spreads on industrial bonds and the underlying Treasury term structure. We use zero-coupon spot rates to eliminate the coupon bias and allow for a consistent study both within and across the different credit ratings. Our results indicate that the level and slope of the Treasury term structure are negatively correlated with changes in the credit spread on investment grade corporate bonds. We also find that the relation between credit spreads and the Treasury term structure is relatively stable through time. This is good news for value-at-risk calculations as this suggests that the correlations amongst assets of different credit classes are stable; therefore use of historic correlations to model spread relations can be valid.

Keywords: credit spreads, coupon bias, correlation

JEL Classification: G21, G24

Suggested Citation

Papageorgiou, Nicolas A. and Skinner, Frank S., Credit Spreads and the Treasury Zero Coupon Spot Curve. Journal of Financial Research, Vol. 29, No 3, pp. 421-439, Fall 2006. Available at SSRN: https://ssrn.com/abstract=712361

Nicolas A. Papageorgiou (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Frank S. Skinner

Brunel University ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

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