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- Title
Exploring the relationship between credit spreads and default probabilities.
- Authors
Manning, Mark J.
- Abstract
This article explores the extent to which variability in sterling corporate credit spreads corresponds to the theory, drawing, in particular, upon the predictions of a structural model of corporate failure. It is informed that previous research has established that the theoretical relationship between credit spreads and default expectations does not hold fully in practice, and this article concurs with that finding. Spreads would appear to be influenced by market factors, such as liquidity premia, and these are likely to be time varying. Thus, it is intuitive that, for high-quality issuers, where both the level and variability of the probability of default is likely to be lower, the relative contribution of default expectations is likely to be much smaller.
- Subjects
SECURITIES; SPREAD (Finance); FINANCE; PROBABILITY theory; RESEARCH; SECURITIES trading
- Publication
Bank of England Quarterly Bulletin, 2004, Vol 44, Issue 3, p326
- ISSN
0005-5166
- Publication type
Article