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On forecasting the term structure of credit spreads

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

Abstract

Predictions of firm-by-firm term structures of credit spreads based on current spot and forward values can be improved upon by exploiting information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future credit spreads; the explanatory power can be increased further by exploiting 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. Current credit-spread and riskless-yield curves impound essentially all marketwide and firm-specific information necessary for predicting future credit spreads.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0705.

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Date of creation: 2007
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Handle: RePEc:fip:fedcwp:0705

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Keywords: Corporate bonds ; Rate of return;

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