Detecting regime shifts in credit spreads

Olfa Maalaoui Chun (), Georges Dionne () and Pascal François ()
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Olfa Maalaoui Chun: KAIST, Graduate School of Finance
Pascal François: HEC Montreal, Finance Department

No 08-2, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market conditions, whereas the volatility regime is short lived and, apart from recessionary periods, detected during major financial crises. Our methodology provides an independent way of supporting structural equilibrium models and points toward monetary and credit supply effects to account for the persistence of credit spreads and their predictive power over the business cycle.

Keywords: Credit spread regimes; level regime; volatility regime; credit cycle; economic cycle; monetary effect; credit supply effect (search for similar items in EconPapers)
JEL-codes: E32 E42 E52 G12 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2008-06-01
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Related works:
Journal Article: Detecting Regime Shifts in Credit Spreads (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2008_002

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