The Slope of the Credit Yield Curve for Speculative‐Grade Issuers

Helwege, Jean; Turner, Christopher M.

doi:10.1111/0022-1082.00170

Cited by 275 publications

(136 citation statements)

References 12 publications

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“…Allowing for this leverage effect leads to model termstructures of credit risk which are upward-sloping, as empirically observed. This result is consistent with the recent studies by Helwege and Turner (1999) and by He, Hu and Lang (2000), which consider pairs of bonds issued by the same company in order to eliminate leverage effects. It also reinforces the conclusion of CollinDufresne and Goldstein (2001) that it is important to take account of the expected trajectory of leverage when computing credit spreads.…”

supporting

confidence: 92%

Testing Merton's Model for Credit Spreads on Zero-Coupon Bonds

Gemmill¹

2002

SSRN Journal

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Structural models for valuing corporate bonds (beginning with Merton (1974)) have been criticised for giving spreads which are (a) too small and (b) have a term structure in which spreads diminish with extra time to maturity. Empirical tests of models are hampered by the complexity of real-world bonds, which have coupons, calls and sinking funds, and also by the complicated and changing capital structures adopted by companies. This paper exploits a new database of zero-coupon bonds issued by closed-end funds in the UK. These companies have very simple capital structures and transparent values for both assets and liabilities. Between 20 and 78 bonds are observable monthly over the period February 1992 to April 2001. Counter to previous research, we find that model and market spreads are on average of similar magnitude. Similar to previous research, market spreads are high (relative to model spreads) for bonds which have low risk and for bonds which are near to maturity. While the observed term-structure of credit spreads is upward-sloping, this may be explained by a predictable drift in leverage over time. On the whole, the results are surprisingly supportive of Merton's model and suggest that it is important to allow for expected changes in leverage when computing credit spreads.

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supporting

confidence: 92%

Testing Merton's Model for Credit Spreads on Zero-Coupon Bonds

Gemmill¹

2002

SSRN Journal

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“…Specifically, our additional controls include (i) Rating it , the issue-specific rating (higher rated issues are expected to have higher credit spreads, given that we code ratings to be increasing in risk), (ii) Age it , the time since issuance in years (liquidity is decreasing for progressively off-the-run securities, so we expect credit spreads to be increasing in time since issuance), and (iii) Duration it , the option-adjusted duration of the issue (for the vast majority of corporate issuers the credit term structure is upward sloping so we expect credit spreads to increase with duration; see Helwege and Turner 1999).…”

Section: Credit Spreadsmentioning

confidence: 99%

Asset volatility

2017

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We examine whether fundamental measures of volatility are incremental to market-based measures of volatility in (i) predicting bankruptcies (out of sample), (ii) explaining cross-sectional variation in credit spreads, and (iii) explaining future credit excess returns. Our fundamental measures of volatility include (i) historical volatility in profitability, margins, turnover, operating income growth, and sales growth; (ii) dispersion in analyst forecasts of future earnings; and (iii) quantile regression forecasts of the interquartile range of the distribution of profitability. We find robust evidence that these fundamental measures of volatility improve out-of-sample forecasts of bankruptcy and help explain cross-sectional variation in credit spreads. This suggests that an analysis of credit risk can be enhanced with a detailed analysis of fundamental information. As a test case of the benefit of volatility forecasting, we document an improved ability to forecast future credit excess returns, particularly when using fundamental measures of volatility.

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“…1 Let us outline some stylised facts about the shape and dynamics of the term structure. A wide variety of term structure shapes has been observed in the market, such as upward sloping, flat, humpshaped and downward sloping curve, see for example [Helwege and Turner, 1999], [Zhou, 2001], [Fons, 1994] and [Helwege and Turner, 1999].…”

Section: Shape and Dynamics Of The Term Structurementioning

confidence: 99%