Forecastable default risk premia and innovations

Patrick Traichal and Steve Johnson ()

Journal of Economics and Finance, 1999, vol. 23, issue 3, 214-225

Abstract: We examine the generating process for default risk premia in short-term and long-term debt sectors of the U.S. economy over the recent period of January 1977 through December 1996. Using weekly aggregates reported by the Federal Reserve, this research finds that all univariate series examined have unit roots which suggests a “long memory” for innovations in the series. Models presented here demonstrate an adjusted R 2 of 59 to 97 percent in sample with similar hold-out sample results. Long-term investment grade corporate bonds exhibit substantial feedback such that lagged innovations have predictive power for nearby risk classes. In the money markets, the flow of information is from less risky assets to more risky assets. Copyright Springer 1999

Date: 1999
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DOI: 10.1007/BF02757706

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