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Modelling credit spreads with time volatility, skewness, and kurtosis

Author

Listed:
  • Ephraim Clark

    (Middlesex University)

  • Selima Baccar

    (IHEC Carthage)

Abstract

This paper seeks to identify the macroeconomic and financial factors that drive credit spreads on bond indices in the US credit market. To overcome the idiosyncratic nature of credit spread data reflected in time varying volatility, skewness and thick tails, it proposes asymmetric GARCH models with alternative probability density functions. The results show that credit spread changes are mainly explained by the interest rate and interest rate volatility, the slope of the yield curve, stock market returns and volatility, the state of liquidity in the corporate bond market and, a heretofore overlooked variable, the foreign exchange rate. They also confirm that the asymmetric GARCH models and Student-t distributions are systematically superior to the conventional GARCH model and the normal distribution in in-sample and out-of-sample testing.

Suggested Citation

  • Ephraim Clark & Selima Baccar, 2018. "Modelling credit spreads with time volatility, skewness, and kurtosis," Annals of Operations Research, Springer, vol. 262(2), pages 431-461, March.
    • Handle: RePEc:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-1975-5
    DOI: 10.1007/s10479-015-1975-5
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    More about this item

    Keywords

    Credit spreads; Asymmetric GARCH; Skewness; Kurtosis; Student-t distribution;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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