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The relationship between interest rates and credit spreads

Appelberg, Linus LU and Nordwall, Erik LU (2024) NEKH02 20241
Department of Economics
Abstract
The dynamics of credit spreads are an essential factor to consider for a broad spectrum of stakeholders foremost when valuing corporate bonds and similar instruments. Through a cointegration approach, this paper first examines the relationship between credit spreads of US corporate bonds and US treasury yields using daily data on yield indices of five different credit ratings and three different maturities over a 15 year period starting from 2009. Secondly, through a Z-test with general form, we examine the difference in said relationship between the credit ratings with the same maturities and also within the group of bonds with different maturities but the same rating. We find a significant negative relationship between credit spreads and... (More)
The dynamics of credit spreads are an essential factor to consider for a broad spectrum of stakeholders foremost when valuing corporate bonds and similar instruments. Through a cointegration approach, this paper first examines the relationship between credit spreads of US corporate bonds and US treasury yields using daily data on yield indices of five different credit ratings and three different maturities over a 15 year period starting from 2009. Secondly, through a Z-test with general form, we examine the difference in said relationship between the credit ratings with the same maturities and also within the group of bonds with different maturities but the same rating. We find a significant negative relationship between credit spreads and interest rates for each credit rating and maturity pair, thereby to a large extent supporting previous empirical studies and economic theory. Additionally, after testing the difference across ratings and maturities, we found that the most notable differences are between investment-grade and speculative-grade bonds. However, some significant differences are also found within the groups. Furthermore, we find that the effect of an interest rate change increases with the maturity for speculative-grade bonds while the inverse is showcased for investment-grade bonds, something future research could delve deeper into. This finding is not covered by previous research and theory. Finally, we suggest that future research should focus on the same segmentation but also include the distinction between non-callable and callable indices in order to examine as specifically as this paper in regards to credit ratings but then include option-adjusted results. (Less)
Please use this url to cite or link to this publication:
author
Appelberg, Linus LU and Nordwall, Erik LU
supervisor
organization
alternative title
An empirical study of US corporate credit spreads across multiple credit ratings and maturities
course
NEKH02 20241
year
type
M2 - Bachelor Degree
subject
keywords
Credit Spread, Interest Rate, Credit Ratings & Maturities
language
English
id
9156646
date added to LUP
2024-09-24 08:57:46
date last changed
2024-09-24 08:57:46
@misc{9156646,
  abstract     = {{The dynamics of credit spreads are an essential factor to consider for a broad spectrum of stakeholders foremost when valuing corporate bonds and similar instruments. Through a cointegration approach, this paper first examines the relationship between credit spreads of US corporate bonds and US treasury yields using daily data on yield indices of five different credit ratings and three different maturities over a 15 year period starting from 2009. Secondly, through a Z-test with general form, we examine the difference in said relationship between the credit ratings with the same maturities and also within the group of bonds with different maturities but the same rating. We find a significant negative relationship between credit spreads and interest rates for each credit rating and maturity pair, thereby to a large extent supporting previous empirical studies and economic theory. Additionally, after testing the difference across ratings and maturities, we found that the most notable differences are between investment-grade and speculative-grade bonds. However, some significant differences are also found within the groups. Furthermore, we find that the effect of an interest rate change increases with the maturity for speculative-grade bonds while the inverse is showcased for investment-grade bonds, something future research could delve deeper into. This finding is not covered by previous research and theory. Finally, we suggest that future research should focus on the same segmentation but also include the distinction between non-callable and callable indices in order to examine as specifically as this paper in regards to credit ratings but then include option-adjusted results.}},
  author       = {{Appelberg, Linus and Nordwall, Erik}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The relationship between interest rates and credit spreads}},
  year         = {{2024}},
}