Macro risk factors of credit default swap indices in a regime-switching framework

Kam Fong Chan and Alastair Marsden

Journal of International Financial Markets, Institutions and Money, 2014, vol. 29, issue C, 285-308

Abstract: Using the Markov regime-switching model, this paper examines factor loadings on macroeconomic, market sentiment and other variables that may explain North American investment-grade and high-yield credit default swap indices (CDX) over the period 2003–2011. In both crisis and tranquil market states, spreads are positively related to the market-wide default premium and VIX, and negatively related to changes in Treasury bond yields, the underlying stock index returns and the Fama–French's High-Minus-Low factor. The magnitude of the factor loadings is higher during crisis periods. The results suggest the need to consider regime dependent hedge ratios to manage credit risk exposure.

Keywords: Credit default swap indices; Investment-grade; High-yield; Regime-switching (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:29:y:2014:i:c:p:285-308

DOI: 10.1016/j.intfin.2014.01.002

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