The Dynamics of Corporate Credit Spreads
by Fred Joutz of George Washington University,
Abstract: We examine how default and systematic risk measures influence corporate credit spreads for investment and non-investment grade corporate bonds over the 1987 to 1997 time period. We find a long-run relation between credit spreads and default risk as measured by the level and the slope of the Treasury term structure. However, the relation between credit spreads and the termucture variables can vary based on the time to maturity and credit quality of corporate bonds. In the short-run, credit spreads are influenced by default risk and the Fama and French systematic risk factors. The results have implications for parameterizing bond and credit derivative pricing models.
Keywords: credit spreads, bond pricing, treasury term structure.