We present a new framework for the joint estimation of the default-free government term structure and corporate credit spread curves. By using a high-quality data set of German mark denominated bonds, we show that this yields more realistic spreads than conventionally obtained spread curves that result from subtracting independently estimated government and corporate term structures. The estimated spread curves are now smooth functions of time to maturity, as opposed to the twisting curves one gets from the traditional method, and are less sensitive to model specifications. Moreover, the implied corporate term structures have tighter confidence intervals.

credit risk splines, estimation, term structure
Econometric Institute Research Papers
Erasmus School of Economics

Houweling, P, Hoek, J, & Kleibergen, F.R. (1999). The Joint Estimation of Term Structures and Credit Spreads (No. EI 9916-/A). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/1586