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Credit Quality Spreads, Bond Market Efficiency and Financial Fragility

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  • Davis, E P

Abstract

The current usefulness in U.K. monetary policy formulation of corporate-government bond yield differentials is assessed. A large U.S. literature stresses a direct link with expected default risk and, hence, the economic cycle but also notes that such a relationship may be distorted by variations in market segmentation or liquidity. The econometric results show a deterioration in U.K. market performance over time, which may be related to changes in liquidity and market segmentation. These imply that spreads may not be a useful monetary indicator and that risk may be inaccurately priced in the U.K. domestic bond markets. Copyright 1992 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Davis, E P, 1992. "Credit Quality Spreads, Bond Market Efficiency and Financial Fragility," The Manchester School of Economic & Social Studies, University of Manchester, vol. 60(0), pages 21-46, Supplemen.
    • Handle: RePEc:bla:manch2:v:60:y:1992:i:0:p:21-46
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    Cited by:

    1. Simon Hall, 2001. "Financial accelerator effects in UK business cycles," Bank of England working papers 150, Bank of England.
    2. Iris Biefang-Frisancho Mariscal & Peter Howells, 2002. "Central Banks and Market Interest Rates," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(4), pages 569-585, July.
    3. Charles S. Morris & Robert Neal & Doug Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper 98-08, Federal Reserve Bank of Kansas City.
    4. repec:dau:papers:123456789/3369 is not listed on IDEAS
    5. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.

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