Detecting Regime Shifts in Credit Spreads

Olfa Maalaoui Chun, Georges Dionne () and Pascal François

Journal of Financial and Quantitative Analysis, 2014, vol. 49, issue 5-6, 1339-1364

Abstract: Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market conditions, whereas the volatility regime is short lived and, apart from recessionary periods, detected during major financial crises. Our methodology provides an independent way of supporting structural equilibrium models and points toward monetary and credit supply effects to account for the persistence of credit spreads and their predictive power over the business cycle.

Date: 2014
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Working Paper: Detecting regime shifts in credit spreads (2008)
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