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Macro factors in the term structure of credit spreads

  • Maurizio Luisi

    (ABN AMRO - ABN-Amro Bank, United Kingdom)

  • Jeffery D. Amato

    (Goldman Sachs International)

Registered author(s):

    We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and Brated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables – indicators of real activity, inflation and financial conditions – as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 203.

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    Length: 68 pages
    Date of creation: Mar 2006
    Date of revision:
    Handle: RePEc:bis:biswps:203
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    1. Hans Dewachter & Marco Lyrio, 2002. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series wpie007, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
    2. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Estimating and Testing Exponential Affine Term Structure Models by Kalman Filter," CIRANO Working Papers 95s-44, CIRANO.
    3. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737.
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