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Predicting credit spreads

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Author Info

  • Krishnan, C.N.V.
  • Ritchken, Peter H.
  • Thomson, James B.

Abstract

Predictions of firm-level credit spreads based on the current spot and forward credit spreads can be significantly improved upon by using the information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future out-of-sample credit spreads; predictions can be significantly improved upon by exploiting the information contained in the shape of the riskless yield curve. In the presence of credit-spread and riskless factors, other macroeconomic, marketwide, and firm-specific risk variables do not significantly improve predictions of credit spreads. These results have important implications for credit-spreads modeling as well as for better understanding corporate capital structure and risk management policies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 19 (2010)
Issue (Month): 4 (October)
Pages: 529-563

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Handle: RePEc:eee:jfinin:v:19:y:2010:i:4:p:529-563

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Web page: http://www.elsevier.com/locate/inca/622875

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References

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Citations

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Cited by:
  1. Comelli, Fabio, 2012. "Emerging market sovereign bond spreads: Estimation and back-testing," Emerging Markets Review, Elsevier, vol. 13(4), pages 598-625.
  2. Shaw, Frances & Murphy, Finbarr & O’Brien, Fergal, 2014. "The forecasting efficiency of the dynamic Nelson Siegel model on credit default swaps," Research in International Business and Finance, Elsevier, vol. 30(C), pages 348-368.
  3. Thiago De Oliveira Souza, 2011. "Forecasting Investment-Grade Credit-Spreads. A Regularized Approach," Working Papers ECARES ECARES 2011-037, ULB -- Universite Libre de Bruxelles.
  4. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.

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