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Predicting credit spreads

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

Predictions of firm-level credit spreads based on the current spot and forward credit spreads can be significantly improved upon by using the information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future out-of-sample credit spreads; predictions can be significantly improved upon by exploiting the 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. These results have important implications for credit-spreads modeling as well as for better understanding corporate capital structure and risk management policies.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 19 (2010)
Issue (Month): 4 (October)
Pages: 529-563

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Handle: RePEc:eee:jfinin:v:19:y:2010:i:4:p:529-563
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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