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Macro risk factors of credit default swap indices in a regime-switching framework

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  • Chan, Kam Fong
  • Marsden, Alastair

Abstract

Using the Markov regime-switching model, this paper examines factor loadings on macroeconomic, market sentiment and other variables that may explain North American investment-grade and high-yield credit default swap indices (CDX) over the period 2003–2011. In both crisis and tranquil market states, spreads are positively related to the market-wide default premium and VIX, and negatively related to changes in Treasury bond yields, the underlying stock index returns and the Fama–French's High-Minus-Low factor. The magnitude of the factor loadings is higher during crisis periods. The results suggest the need to consider regime dependent hedge ratios to manage credit risk exposure.

Suggested Citation

  • Chan, Kam Fong & Marsden, Alastair, 2014. "Macro risk factors of credit default swap indices in a regime-switching framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 285-308.
    • Handle: RePEc:eee:intfin:v:29:y:2014:i:c:p:285-308
    DOI: 10.1016/j.intfin.2014.01.002
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    More about this item

    Keywords

    Credit default swap indices; Investment-grade; High-yield; Regime-switching;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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