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Are CDS spreads predictable? An analysis of linear and non-linear forecasting models

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  • Avino, Davide
  • Nneji, Ogonna

Abstract

This paper investigates the forecasting performance for CDS spreads of both linear and non-linear models by analysing the iTraxx Europe index during the financial crisis period which began in mid-2007. The statistical and economic significance of the models’ forecasts are evaluated by employing various metrics and trading strategies, respectively. Although these models provide good in-sample performances, we find that the non-linear Markov switching models underperform linear models out-of-sample. In general, our results show some evidence of predictability of iTraxx index spreads. Linear models, in particular, generate positive Sharpe ratios for some of the strategies implemented, thus shedding some doubts on the efficiency of the European CDS index market.

Suggested Citation

  • Avino, Davide & Nneji, Ogonna, 2012. "Are CDS spreads predictable? An analysis of linear and non-linear forecasting models," MPRA Paper 42848, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42848
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    Cited by:

    1. repec:eee:ecolet:v:161:y:2017:i:c:p:5-9 is not listed on IDEAS
    2. Rebekka Gätjen & Melanie Schienle, 2015. "Measuring Connectedness of Euro Area Sovereign Risk," SFB 649 Discussion Papers SFB649DP2015-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. repec:taf:oaefxx:v:4:y:2016:i:1:p:1210996 is not listed on IDEAS

    More about this item

    Keywords

    Credit default swap spreads; iTraxx; Forecasting; Markov switching; Market efficiency; Technical trading rules;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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