Revisiting the Slope of the Credit Spread Curve

Posted: 26 Oct 2005

See all articles by David Lando

David Lando

Copenhagen Business School - Department of Finance

Allan Mortensen

Independent; Copenhagen Business School

Abstract

The term structure of interest rates contains information about the market's expectations of the direction of future interest rates. Similarly, the term structure of credit spreads contains information about the market's perception of future credit spreads. The term structure of credit spreads is closely linked with conditional default probabilities and this link suggests a downward sloping term structure of credit spreads for high risk issuers, whose default probability conditional on survival is likely to decrease. This paper shows that for sufficiently low credit quality, as defined by the level of credit spreads, this holds true most of the time when spreads are taken from credit default swap (CDS) markets. We also discuss why CDS markets give a better way of analyzing this problem than bond price data.

Keywords: Term structure of credit spreads, slope, credit default swaps, types of recovery

JEL Classification: G00

Suggested Citation

Lando, David and Mortensen, Allan, Revisiting the Slope of the Credit Spread Curve. Journal of Investment Management, Vol. 3, No. 4, Fourth Quarter 2005, Available at SSRN: https://ssrn.com/abstract=794668

David Lando (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3, SOL/A4.17
Copenhagen, Frederiksberg 2000

Allan Mortensen

Independent ( email )

Copenhagen Business School ( email )

DK - 2000 Frederiksberg C
Denmark

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
2,158
PlumX Metrics