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

  • Chan, Kam Fong
  • Marsden, Alastair
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    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.

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    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 29 (2014)
    Issue (Month): C ()
    Pages: 285-308

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    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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