What does the empirical evidence suggest about the behavior of corporate credit spreads concerning whether credit spread changes should be measured on an absolute versus relative basis?
What will be an ideal response?
The decision to use the absolute change or the percentage change to measure the change in credit spreads is important in the management of credit-risky portfolios. Consequently, the empirical question is which measure best describes the historical change in credit spreads. A comprehensive study using an extensive corporate database that includes more than 560,000 observations found that credit spread changes are proportional to the level of the credit spread. Thus, it appears (fromempirical evidence about the behavior of corporate credit spreads) that credit spread changes should be measured on a proportional (or relative) basis.
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