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Credit spread changes within switching regimes

Olfa Maalaoui Chun, Georges Dionne and Pascal François

Journal of Banking & Finance, 2014, vol. 49, issue C, 41-55

Abstract: Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. A single-regime model hides the fact that explanatory variables take on different loadings across changing patterns in credit spreads. In a model with endogenous regimes for credit spreads or with monetary regimes, we find that market, default, and liquidity factors have superior explanatory power because of their interaction with the regime. Lower improvements are found when the regime is defined according to the credit supply regime or the NBER regimes (announced and official).

Keywords: Credit cycle; NBER economic cycle; Monetary cycle; Credit supply cycle; Markov switching regimes; Market risk; Liquidity risk (search for similar items in EconPapers)
JEL-codes: C32 C52 C61 G12 G13 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Credit Spread Changes within Switching Regimes (2009) Downloads
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Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:41-55