Credit Spread Changes within Switching Regimes

Olfa Maalaoui, Georges Dionne () and Pascal François

Cahiers de recherche from CIRPEE

Abstract: Many empirical studies on credit spread determinants consider a single-regime model over the entire sample period and find limited explanatory power. We model the credit cycle independently from macroeconomic fundamentals using a Markov regime switching model. We show that accounting for endogenous credit cycles enhances the explanatory power of credit spread determinants. The single regime model cannot be improved when conditioning on the states of the NBER economic cycle. Furthermore, the regime-based model highlights a positive relation between credit spreads and the risk-free rate in the high regime. Inverted relations are also obtained for some other determinants.

Keywords: Credit spread; switching regimes; market risk; liquidity risk; default risk; credit cycle; NBER economic cycle (search for similar items in EconPapers)
JEL-codes: C32 C52 C61 G12 G13 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Credit spread changes within switching regimes (2014)
Working Paper: Credit spread changes within switching regimes (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0905

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