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Credit spread determinants: An 85 year perspective

  • Davies, Andrew
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    This paper estimates a set of credit spread forecasting models using an 85 year history for AAA and BAA corporate bond yield data for the US. Credit spreads are defined as the corporate bond yield less the 20 year yield on US government bonds and are explained by a set of intuitively appealing financial and economic variables. Initial results relate to the application of cointegration techniques to provide long and short run estimates of the key determinants of credit spreads. The analysis is then extended to allow for an unobservable latent variable Markov Switching specification across two separate states. Finally a deterministic regime model based upon an inflation threshold is estimated demonstrating that key causal relationships exist independently across different inflationary environments.

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    File URL: http://www.sciencedirect.com/science/article/B6VHN-4PX7BCP-1/1/b3eb2b41a3f92d70feb60ac9b040e1b2
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    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 11 (2008)
    Issue (Month): 2 (May)
    Pages: 180-197

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    Handle: RePEc:eee:finmar:v:11:y:2008:i:2:p:180-197
    Contact details of provider: Web page: http://www.elsevier.com/locate/finmar

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    1. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    2. Chance, Don M, 1990. " Default Risk and the Duration of Zero Coupon Bonds," Journal of Finance, American Finance Association, vol. 45(1), pages 265-74, March.
    3. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    5. repec:cup:cbooks:9780521770415 is not listed on IDEAS
    6. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    7. Charles S. Morris & Robert Neal & Douglas Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper 98-08, Federal Reserve Bank of Kansas City.
    8. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    9. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
    10. repec:cup:cbooks:9780521779654 is not listed on IDEAS
    11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
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