Modelling credit spreads with time volatility, skewness, and kurtosis

Ephraim Clark and Selima Baccar ()
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Selima Baccar: IHEC Carthage

Annals of Operations Research, 2018, vol. 262, issue 2, No 10, 461 pages

Abstract: Abstract This paper seeks to identify the macroeconomic and financial factors that drive credit spreads on bond indices in the US credit market. To overcome the idiosyncratic nature of credit spread data reflected in time varying volatility, skewness and thick tails, it proposes asymmetric GARCH models with alternative probability density functions. The results show that credit spread changes are mainly explained by the interest rate and interest rate volatility, the slope of the yield curve, stock market returns and volatility, the state of liquidity in the corporate bond market and, a heretofore overlooked variable, the foreign exchange rate. They also confirm that the asymmetric GARCH models and Student-t distributions are systematically superior to the conventional GARCH model and the normal distribution in in-sample and out-of-sample testing.

Keywords: Credit spreads; Asymmetric GARCH; Skewness; Kurtosis; Student-t distribution (search for similar items in EconPapers)
JEL-codes: C58 F34 G15 G17 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s10479-015-1975-5

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