Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities
23 Pages Posted: 10 Sep 2006
Date Written: September 2006
This paper investigates the change of the credit spread volatility from 1993 to 2001. We find that credit spreads between junk grade corporate bonds and Treasury bond are significantly more volatile in the second half of this period when credit related securities become popular. However credit spreads between investment-grade corporate debt and Treasury are not significantly more volatile. For the period prior to the introduction of credit related securities, credit spread changes followed mean reverting processes. In the period with rapid growth of these new products, the credit spread changes shifted toward random walk processes. The loss of the mean reverting process with the advent of the new securities is consistent with increased market efficiency.
Keywords: credit spead volatility, market efficiency
JEL Classification: G10
Suggested Citation: Suggested Citation