Time Variation in the Credit Spreads on Australian Eurobonds

Abstract

Traditional theories of credit spread behaviour predict that changes in the risk-free interest rate and asset factors are negatively correlated with changes in credit spreads on risky bonds. This study investigates this proposition in the Australian context by investigating the spread between three different rating classes and four maturities of Australian dollar Eurobonds and Australian government bonds. Using a daily data set that is divided into three subperiods between 2 January 1995 and 25 August 1998, the results confirm this empirical proposition. However, the relative weight of the explanatory variables changes with the subperiods investigated.

Keywords: Credit spreads, Eurobonds, Australia

JEL Classification: C32, G15