Measuring credit spreads: Evidence from Australian Eurobonds

Batten, JA; Hogan, WP; Jacoby, G

Measuring credit spreads: Evidence from Australian Eurobonds

Batten, JA Hogan, WP Jacoby, G

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Publication Type:: Journal Article
Citation:: Applied Financial Economics, 2005, 15 (9), pp. 651 - 666
Issue Date:: 2005-06-01

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Field	Value	Language
dc.contributor.author	Batten, JA	en_US
dc.contributor.author	Hogan, WP	en_US
dc.contributor.author	Jacoby, G	en_US
dc.date.issued	2005-06-01	en_US
dc.identifier.citation	Applied Financial Economics, 2005, 15 (9), pp. 651 - 666	en_US
dc.identifier.issn	0960-3107	en_US
dc.identifier.uri	http://hdl.handle.net/10453/5082
dc.description.abstract	Recent theoretical models including the closed-form valuation model of Longstaff and Schwartz (1995) predict that credit spreads are driven by both an asset and interest rate factor. In empirical studies the credit spread may be expressed as either the difference between, or ratio of, the risky bond to a riskless bond. Using a daily sample of non-callable Australian dollar denominated Eurobonds it is found, consistent with theory, that changes in credit spreads are negatively related to both changes in the return on All Ordinaries stock Index and changes in the Government bond yield. Interestingly, the ratio measure - termed a relative credit spread - tends to be statistically more significant than the alternate measure based upon the difference - termed an actual credit spread. However, it is shown that this result is spurious and due to the way in which relative credit spreads are constructed. Noting Duffee's (1998) warning against using callable bonds, the use of only non-callable Eurobonds provides a cleaner result when compared with tests conducted by Longstaff and Schwartz (1995). © 2005 Taylor & Francis Group Ltd.	en_US
dc.relation.ispartof	Applied Financial Economics	en_US
dc.relation.isbasedon	10.1080/09603100500056809	en_US
dc.subject.classification	Finance	en_US
dc.title	Measuring credit spreads: Evidence from Australian Eurobonds	en_US
dc.type	Journal Article
utslib.citation.volume	9	en_US
utslib.citation.volume	15	en_US
utslib.for	140210 International Economics and International Finance	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.issue	9	en_US
pubs.publication-status	Published	en_US
pubs.volume	15	en_US

Abstract:

Recent theoretical models including the closed-form valuation model of Longstaff and Schwartz (1995) predict that credit spreads are driven by both an asset and interest rate factor. In empirical studies the credit spread may be expressed as either the difference between, or ratio of, the risky bond to a riskless bond. Using a daily sample of non-callable Australian dollar denominated Eurobonds it is found, consistent with theory, that changes in credit spreads are negatively related to both changes in the return on All Ordinaries stock Index and changes in the Government bond yield. Interestingly, the ratio measure - termed a relative credit spread - tends to be statistically more significant than the alternate measure based upon the difference - termed an actual credit spread. However, it is shown that this result is spurious and due to the way in which relative credit spreads are constructed. Noting Duffee's (1998) warning against using callable bonds, the use of only non-callable Eurobonds provides a cleaner result when compared with tests conducted by Longstaff and Schwartz (1995). © 2005 Taylor & Francis Group Ltd.

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http://hdl.handle.net/10453/5082