PT  - JOURNAL ARTICLE
AU  - Robert Neal
AU  - Douglas Rolph
AU  - Brice Dupoyet
AU  - Xiaoquan Jiang
TI  - Interest Rates and Credit Spread Dynamics
AID  - 10.3905/jod.2015.23.1.025
DP  - 2015 Aug 31
TA  - The Journal of Derivatives
PG  - 25--39
VI  - 23
IP  - 1
4099  - https://pm-research.com/content/23/1/25.short
4100  - https://pm-research.com/content/23/1/25.full
AB  - Corporate credit spreads narrow when the general level of rates is high, but the effect appears to go well beyond what can be justified by firm-specific and marketwide credit conditions. In this article, the authors argue that the phenomenon is largely a statistical artifact caused by failure to take account of cointegration between Treasury and corporate yields. Using a generalized impulse-response approach and conditioning on the current level of rates, they find that large shocks to the Treasury curve do not produce significant changes in credit spreads, either contemporaneously or out to three years in the future. Among other things, this empirical result calls into question assumptions commonly made in theoretical models of corporate credit risk.TOPICS: Fixed income and structured finance, credit risk management