The model says that when there is positive surprise in credit quality spread, the return of the asset increases. Shouldn’t the asset return decrease instead since bond prices decrease when spreads increase?
Credit quality improves means spread decrease, not increase
Yes, when your bond spread decrease it means you going good (your associated risk is lower) so your bond price is likely to rise.
thanks it is correct that when bond spreads decrease prices increase which is good.
however credit spread is I believe in the textbook defined as (BB bond yields - Treasury).
so an increase in that value would actually be a decrease in credit quality.
should the factor in the model thus be a - instead of a + since it appears to be negatively related?
When the economy improves, the credit spread will decrease, not increase, so your (BB-Ty) will go down.
Hi yes indeed but if I’m not mistaken the return formula in the textbook says the return is +(plus) credit spread when it should be -(minus) credit spread. The return should incresae when the credit spread decreases.m I missing something?