Inter-temporal stability of the European credit spread co-movement structure
Faculty of Applied Economics
Antwerpen :UFSIA, 2002
Research paper / Faculty of Applied Economics UFSIA-RUCA ; 2002:008
University of Antwerp
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. Within a multivariate framework, the Box and Jennrich tests are 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 between various (investment grade) credit spread changes remain stable over the 1998-2000 period. Covariances on the other hand, turn out to be time-varying over that period.