Default and liquidity regimes in the bond market during the 2002-2012 period

Georges Dionne () and Olfa Maalaoui Chun ()
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Olfa Maalaoui Chun: HEC Montreal, Canada Research Chair in Risk Management

No 13-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: Using a real-time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002-2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain the predictive power of credit risk on the 2007-2009 NBER recession, whereas the default regime drives the persistence of credit spreads over the same recession. Our results complement the recent dynamic structural models as well as monetary and credit supply effects models by empirically supporting two important patterns in credit spreads: the persistence and the predictive ability toward economic downturns.

Keywords: Credit spread; credit default swaps; real-time regime detection; market risk; liquidity cycle; default cycle; credit cycle; NBER economic cycle (search for similar items in EconPapers)
JEL-codes: C32 C52 C61 G12 G13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-09-16
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Related works:
Journal Article: Default and liquidity regimes in the bond market during the 2002-2012 period (2013)
Working Paper: Default and Liquidity Regimes in the Bond Market during the 2002-2012 Period (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2013_004

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