Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities

23 Pages Posted: 10 Sep 2006

See all articles by Christopher Hessel

Christopher Hessel

City University of New York

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: September 2006

Abstract

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

Hessel, Christopher and Wang, Jun, Changes in Volatility of Credit Spread and Market Efficiency During Rapid Growth of Credit Related Securities (September 2006). Available at SSRN: https://ssrn.com/abstract=929125 or http://dx.doi.org/10.2139/ssrn.929125

Christopher Hessel (Contact Author)

City University of New York ( email )

17 Lexington Avenue
New York, NY 10021
United States

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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