Modeling Corporate CDS Spreads Using Markov Switching Regressions

Baltodano López Ovielt (), Bulfone Giacomo (), Roberto Casarin and Ravazzolo Francesco ()
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Baltodano López Ovielt: Department of Economics, Ca’ Foscari University of Venice, Venice, Italy
Bulfone Giacomo: Department of Economics, Ca’ Foscari University of Venice, Venice, Italy
Ravazzolo Francesco: Free University of Bozen-Bolzano, Bolzano, Italy

Studies in Nonlinear Dynamics & Econometrics, 2024, vol. 28, issue 2, 271-292

Abstract: This paper investigates the determinants of the European iTraxx corporate CDS index considering a large set of explanatory variables within a Markov switching model framework. The influence of financial and economic variables on CDS spreads are compared using linear, two, three, and four-regime models in a sample post-subprime financial crisis up to the COVID-19 pandemic. Results indicate that four regimes are necessary to model the CDS spreads. The fourth regime was activated during the COVID-19 pandemic and in high volatility periods. Further, the effect of the covariates differs significantly across regimes. Brent and term structure factors became relevant after the outbreak of the COVID-19 pandemic.

Keywords: corporate CDS index; Markov switching; Bayesian econometrics (search for similar items in EconPapers)
JEL-codes: C11 C24 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/snde-2022-0106

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