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.
