Credit Spreads Between German and Italian Sovereign Bonds - &#x0D;
Do Affine Models Work?

Düllmann, Klaus; Windfuhr, Marc

doi:10.2139/ssrn.189992

Cited by 13 publications

(9 citation statements)

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“…Following Merrick (1999) for Argentine and Russian bonds, Keswani (1999) and Pagès (2000) on Latin American Brady bonds and Dullman and Windfuhr (2000) on European government credit spreads, we model bond prices as a function of interest rate sensitivity and credit quality, which we capture with downgrades. 28 We expect bond prices to be inversely related to interest rates, in general, as an increase in interest rates will make demand for existing bonds fall.…”

Section: Methodsmentioning

confidence: 99%

Controlling the risk: a case study of the Indian liquidity crisis 1990–92

Clark

Lakshmi

2003

J of Intl Development

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Over the period 1990-92, India experienced a foreign exchange crisis complicated by political turmoil that led to three rapid downgrades of its credit rating within the short space of a year. However, India did not default or reschedule its debt and with the help of foreign exchange loans after 44 years of socialism, proceeded with a structural, market-oriented reform of the economy. This crisis differs from the subsequent crises in Mexico, Asia and Russia that followed later in the 1990s in that it did not spread to other countries. The reaction of the international markets was mild. Net flows of private foreign capital remained positive over the crisis period and the three rating migrations increased the country's cost of borrowing by only 1 per cent. The reaction of domestic markets was also positive and by the end of 1991 the local stock market had started an impressive bull run. Thus, the case of India 1990-92 is an interesting study in macroeconomic crisis management with lessons for the future. The crisis was short, damage to investor confidence was minimal, and a turnaround was achieved within three years. This study attempts to examine the crisis, its handling and reaction of the market to downgradings. Copyright © 2003 John Wiley & Sons, Ltd.

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Section: Methodsmentioning

confidence: 99%

Controlling the risk: a case study of the Indian liquidity crisis 1990–92

Clark

Lakshmi

2003

J of Intl Development

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“…Membership also provides a framework of regulation through which contracts can be enforced. 14 But some have noted that the spreads between German bonds and those of poorer countries in the unions seem unnaturally low and do not reflect the actual differences in risk between the markets (Codogno, Favero, and Missale 2003;Dullmann and Windfuhr 2000;Orlowski and Lommatzsch 2005). 15 Of related interest, then, would be a separate empirical investigation of whether the EU seal of approval could be selffulfilling.…”

Section: Figure 1 Slovak Bond Yields and Eu Accessionmentioning

confidence: 99%

International Organization as a Seal of Approval: European Union Accession and Investor Risk

Gray

2009

American J Political Sci

103

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Much of the literature on international institutions argues that membership regularizes expectations about members' future behavior. Using the accession of the postcommunist countries as a test case, this article argues that the EU can send strong signals to financial markets about the trajectory of a particular country. Examining spreads on sovereign debt from 1990 to 2006, this article shows that closing negotiation chapters on domestic economic policy-in other words, receiving a seal of approval from Brussels that previously existing policy reform is acceptable to the wider EU-substantially decreases perceptions of default risk in those countries. That decrease operates independently from policy reform that the country has taken and is also distinct from selection processes (modeled here with new variables, including UNESCO World Heritage sites and domestic movie production, that proxy for cultural factors). Thus, this particular international organization has played an important role in coordinating market sentiment on members, conferring confidence that policy reform alone could not accomplish.

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“…We choose this data set for several reasons: 1) It constitutes the largest and most liquid bond market where bonds of different issuers are traded in a homogeneous environment; 2) in comparison to the corporate bond market, the quality and reliability of the price information is much better; and 3) credit spread curves obtained from EMU government bond prices have already been used by other researchers, e.g., Düllmann and Windfuhr [2000] and Geyer, Kossmeier, and Pichler [2004].…”

Section: Empirical Analysismentioning

confidence: 99%

“…Traditionally, credit spreads are calculated by subtracting independently estimated risk-free and risky term structures of interest rates, which in many cases yields unrealistically shaped and often irregular credit spread curves. Düllmann and Windfuhr [2000] and Geyer, Kossmeier, and Pichler [2004] report twisted credit spread curves for European Monetary Union government debt when the German curve is used as the risk-free reference curve.…”

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Parsimonious Estimation of Credit Spreads

Jankowitsch¹,

Pichler²

2004

JFI

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O ver the last decade it has become more and more important to understand and model credit risk. Growing markets for corporate bonds and credit derivatives have stimulated development of advanced valuation and risk management models. The new Basel Capital Accord has also fueled the evolution of theoretical and applied research in credit risk.Many of the new credit risk models require accurate observations of the term structure of interest rates of different credit risk classes as an input. Prominent examples are the Markov chain framework first introduced by Jarrow and Turnbull [1995] and extended by Jarrow, Lando, and Turnbull [1997], and the class of reduced-form models that exogenously model the default intensity of a Poisson process as a function of stochastic state variables. This approach, introduced by Duffie and Singleton [1997] and Lando [1998], enables the use of well-established results and techniques from the world of affine risk-free term structure models.Both classes of models rely on the availability of reasonable data for term structures of credit spreads, i.e., the term structure of differences between risky term structures and the risk-free one. Apparently, there is a need for accurate and reliable procedures that estimate the term structure of credit spreads from observable coupon bond prices.The estimation of the discount function or the zero-coupon yield curve from observ-

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Credit Spreads Between German and Italian Sovereign Bonds - Do Affine Models Work?

Cited by 13 publications

References 0 publications

Controlling the risk: a case study of the Indian liquidity crisis 1990–92

Controlling the risk: a case study of the Indian liquidity crisis 1990–92

International Organization as a Seal of Approval: European Union Accession and Investor Risk

Parsimonious Estimation of Credit Spreads

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