Credit spread changes within switching regimes

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 09-1, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: Empirical studies on credit spread determinants consider a single-regime model over the entire sample period and find limited explanatory power. We model the rating-specific credit cycle by estimating Markov switching regimes from credit spread data. Accounting for endogenous credit cycles significantly enhances the explanatory power of credit spread determinants for all ratings and up to 67% for BBB spreads. The single regime model cannot be improved when conditioning on the NBER cycle. Our 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 other determinants including liquidity.

Keywords: Credit spread; Markov 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)
Pages: 48 pages
Date: 2010-10-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Credit spread changes within switching regimes (2014)
Working Paper: Credit Spread Changes within Switching Regimes (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2009_001

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