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An empirical investigation into credit spread indices

Prigent, Jean-Luc, Renault, Olivier and Scaillet, Olivier (2001) An empirical investigation into credit spread indices. The Journal of Risk, 3 (3). pp. 27-56. ISSN 1465-1211

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Abstract

The authors study the dynamics of the spread between US corporate and Treasury bonds. They focus on Aaa and Baa corporate yield indices and estimate the dynamics of the spreads nonparametrically assuming that they follow a univariate diffusion process. Using techniques developed for interest rate processes, they attempt to infer from the data what acceptable process can be used to model aggregate credit spreads for option pricing or risk management purposes. It is found that there is significant evidence of mean reversion, especially for higher-rated spreads, and that the volatility of Aaa spreads exhibit a U-shape while the volatility of Baa spreads is monotonically increasing in the level of spreads. Based on these observations and on the evidence of jumps in the series, a new model is proposed for credit spread indices (an Ornstein-Uhlenbeck process with jumps) and estimated using maximum likelihood.

Item Type: Article
Official URL: http://www.thejournalofrisk.com/
Additional Information: © 2001 Incisive Media
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Research centres and groups > Financial Markets Group (FMG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 16 Nov 2008 20:42
URL: http://eprints.lse.ac.uk/18729/

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