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Interest Rates, Stock Returns and Credit Spreads: Evidence from German Eurobonds

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  • Niklas Wagner
  • Warren Hogan
  • Jonathan Batten

Abstract

We investigate daily variations in credit spreads on investment‐grade Deutschemark‐denominated Eurobonds during the challenging 1994–1998 period. Empirical results from a Longstaff and Schwartz (1995) two‐factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term‐structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity. Tentative interpretations are portfolio‐rebalancing activities or differing risk factor sensitivities on short‐ vs. long‐maturity bonds.

Suggested Citation

  • Niklas Wagner & Warren Hogan & Jonathan Batten, 2005. "Interest Rates, Stock Returns and Credit Spreads: Evidence from German Eurobonds," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 34(1), pages 35-50, February.
    • Handle: RePEc:bla:ecnote:v:34:y:2005:i:1:p:35-50
    DOI: 10.1111/j.0391-5026.2005.00143.x
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    References listed on IDEAS

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    1. Jean Helwege & Christopher M. Turner, 1999. "The Slope of the Credit Yield Curve for Speculative‐Grade Issuers," Journal of Finance, American Finance Association, vol. 54(5), pages 1869-1884, October.
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    3. Delianedis, Gordon & Geske, Robert, 2001. "The Components of Corporate Credit Spreads: Default, Recovery, Tax, Jumps, Liquidity, and Market Factors," University of California at Los Angeles, Anderson Graduate School of Management qt32x284q3, Anderson Graduate School of Management, UCLA.
    4. Michael Boss & Martin Scheicher, 2002. "The determinants of credit spread changes in the euro area," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 181-199, Bank for International Settlements.
    5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    6. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    7. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Gady Jacoby & Chuan Liao & Jonathan A. Batten, 2007. "A Pure Test for the Elasticity of Yield Spreads," The Institute for International Integration Studies Discussion Paper Series iiisdp195, IIIS.
    2. Inwon Jang & David Kim, 2009. "The Dynamics of the Credit Spread and Monetary Policy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 109-131, May.
    3. Loncarski, Igor & Szilagyi, Peter G., 2012. "Empirical analysis of credit spread changes of US corporate bonds," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 12-19.

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