Inter-Temporal Stability of the European Credit Spread Co-Movement Structure
University of Antwerp Working Paper
19 Pages Posted: 2 Jan 2004
Date Written: September 2003
Corporate bonds expose the investor to credit risk, which will be reflected in the credit spread. Based on the EMU Broad Market indices, we study the inter-temporal stability of the covariance and correlation matrices of credit spread changes on weekly data. For a multivariate framework, the Box and Jennrich tests are the most commonly used test statistics in the literature. However, we show that for small samples these tests are not well specified when the normality assumption is relaxed. A bootstrap-based statistical inference provides evidence that correlations and covariances between various (investment grade) credit spread changes are unstable over the 1998-2003 period.
Keywords: credit spreads, diversification, correlations, corporate bonds
JEL Classification: G110, G150
Suggested Citation: Suggested Citation