Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper analyzes the impact of macroeconomic announcements on the correlation between credit spreads and the term structure of interest rates. We propose to employ an extented version of the Constant Conditional Correlations framework of Bollerslev (1990) to describe the evolution of the first difference of the slope of the term structure. Our main empirical findings can be summarized as follow: (a) The credit spread and the level of the term structure are uncorrelated on macroeconomic announcement days. (b) The credit spread and the level of the term structure are negatively correlated. (c) The credit spread and the slope of the term structure are negatively correlated. (d) The process for the conditional variance of the credit spread is highly persistent. (e) The conditional variance of the credit spread is smaller on macroeconomic announcement days than on other days. The results, (a) in particular, provide important new information about how corporate bond asset pricing models should be specified.

Keywords: Constant Conditional Correlations; Corporate Bonds; Credit Spreads; Macroeconomic News; Treasury Yields

22 pages, July 1, 2000

Note: Later published in International Review of Financial Analysis

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