REVISITING THE SLOPE OF THE CREDIT CURVE

David Lando and Allan Mortensen

This paper revisits the shape of the credit spread curve using a large data set of credit default swap quotes. Helwege and Turner (1999) find upward-sloping corporate bond spread curves for speculative grade companies and argue that this is inconsistent with many theoretical credit risk pricing models. We find decreasing curves for issuers of sufficiently low credit quality, measured either by credit rating or credit spread level, and conclude that there is no discrepancy between theoretical pricing models and the empirical shape of the credit curve.