Regime Switches in the Yield Curve-Credit Spread Relationship and the Prediction of Recessions

Dimitris Georgoutsos and Thomas I. Kounitis
Additional contact information
Thomas I. Kounitis: eBay Analytics

Chapter Chapter 9 in Money, Trade and Finance, 2021, pp 169-191 from Springer

Abstract: Abstract This chapter deals with the dynamic relationship between term and credit spreads within a framework that incorporates regime shifts. Through the estimation of an asymmetric Markov-Switching Vector Equilibrium Correction Model (MS-VECM), comprising the short- and the long-term risk-free rate and the Moody’s Baa-rated bond rate, we arrive at three basic results. First, the short-run relationship between credit and term spreads is regime dependent, being negative and significant during low volatility periods only and in the presence of an inverted yield curve. Second, through an impulse response analysis, it is established that the response of credit spreads to a given change in the term spread depends on the rate, short- or long term, that has caused this change. Third, a probit analysis reveals that the credit spread is a useful predictor of future economic recessions, both at a six-month and a one-year ahead horizon, and that this result is valid even in the presence of the term spread variable.

Date: 2021
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-73219-6_9

Ordering information: This item can be ordered from
http://www.springer.com/9783030732196

DOI: 10.1007/978-3-030-73219-6_9

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().