The Term Structure of Credit Spreads and Credit Default Swaps - An Empirical Investigation

Abstract

We investigate the term structure of credit spreads and credit default swaps for different rating categories. It is well-known quite that for issuers with lower credit quality higher spreads can be observed in the market and vice versa. However, empirical results on spreads for bonds with the same rating but different maturities are rather controversial. We provide empirical results on the term structure of credit spreads based on a large sample of Eurobonds and domestic bonds from EWU-countries. Further we investigate maturity effects on credit default swaps and compare the results to those of corporate bonds. We find that for both instruments a positive relationship between maturity and spreads could be observed for investment grade debt. For speculative grade debt the results are rather ambiguous. We also find that spreads for the same rating class and same maturity exhibit very high variation.

Keywords: Credit Spreads, Credit Default Swaps, Maturity Effects, Reduced Form Models

JEL Classification: G12