Credit Spread Changes within Switching Regimes PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download Credit Spread Changes within Switching Regimes PDF full book. Access full book title Credit Spread Changes within Switching Regimes by Olfa Maalaoui Chun. Download full books in PDF and EPUB format.
Author: Olfa Maalaoui Chun
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
Get Book Here
Book Description
Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. We show that a single regime model hides the fact that the explanatory variables take on different loadings across changing patterns in credit spreads. We capture these hidden effects by modeling endogenous (rating-specific) regimes for credit spreads. We find that in a two regime-based model traditional determinants have significant explanatory power consistent with the prediction of structural models, yet their importance changes across regimes -- some variables have their effects strengthen, weaken or even reverse signs across regimes. We also investigate the differing behavior of these loadings across different specifications of the economic cycle and find that endogenous regimes best capture the hidden effects of these variables with the highest explanatory power for the same set of variables.
Author: Olfa Maalaoui Chun
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
Get Book Here
Book Description
Empirical studies on credit spread determinants are predicated on the presence of a single-regime over the entire sample period and thus find limited explanatory power. We show that a single regime model hides the fact that the explanatory variables take on different loadings across changing patterns in credit spreads. We capture these hidden effects by modeling endogenous (rating-specific) regimes for credit spreads. We find that in a two regime-based model traditional determinants have significant explanatory power consistent with the prediction of structural models, yet their importance changes across regimes -- some variables have their effects strengthen, weaken or even reverse signs across regimes. We also investigate the differing behavior of these loadings across different specifications of the economic cycle and find that endogenous regimes best capture the hidden effects of these variables with the highest explanatory power for the same set of variables.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
Get Book Here
Book Description
Author: Dimitris A. Georgoutsos
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
Get Book Here
Book Description
The purpose of this paper is to shed new light on the conflicting empirical evidence on the relationship between credit spreads and Treasury rates. Following a general-to-specific modelling approach, we were unable to accept the presence of a long-run relationship between Baa credit spreads and long-term Treasury rates. At the same time, and in support of the structural models on credit risk modelling, a negative short-run relationship was obtained by means of impulse response functions. Subsequently, by employing a regime-switching estimation technique, we were able to establish the importance of the Treasury yield curve slope for the Baa credit spread determination in periods characterized by low interest rate volatility. Finally, we were able to provide evidence of an asymmetric response of the Baa credit spread to term spread changes according to the source of these changes, i.e. short or long term Treasury rates.
Author: Ioanna T. Kokores
Publisher: Palgrave Macmillan
ISBN: 9783030732219
Category : Business & Economics
Languages : en
Pages : 0
Get Book Here
Book Description
This book analyses several aspects on the efficient resource allocation in the aftermath of the global financial crisis and the European sovereign debt crisis. The main focus of the volume is on recent European Union (EU) experience highlighting the interrelation between inherent structural rigidities and practical limitations in the conduct of sound economic policy. Special reference is made to Greece (evidencing unprecedented experience), the EU periphery countries and the US. This book will be of interest to academic and central bank researchers, business practitioners (in consultancy and finance) and graduate students, as it is a good example of how scholarly dialogue can contribute to contemporary high-quality policy debate on sound liquidity provision and financial stability in the Eurozone, as well as the effective ways to combat recession in the EU periphery countries.
Author: Yu-Fan Huang
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
Get Book Here
Book Description
Through the lens of the Taylor rule, this paper is concerned with the circumstances in which the Fed would change its behavior. A Bayesian MCMC method is proposed to deal with a switching Taylor rule robust to zero lower bound and heteroscedasticity. The posterior results from Markov-switching Taylor rule indicate that, first, there is strong evidence for an “active” regime in which the Fed responses to output gap aggressively. Second, the movements in the posterior probability of the active regime is highly correlated with credit spreads. I then use a switching Taylor rule with transition probabilities connected to credit spreads to show that the positive correlation is strongly supported by data, implying that the Fed responses to output gap more strongly when the credit spreads rise.
Author: Jason Z. Ma
Publisher:
ISBN:
Category :
Languages : en
Pages :
Get Book Here
Book Description
Author: Christoph Riedel
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
Get Book Here
Book Description
We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.
Author: Donatien Hainaut
Publisher:
ISBN:
Category :
Languages : en
Pages : 22
Get Book Here
Book Description
We develop a switching regime version of the intensity model for credit risk pricing. The default event is specified by a Poisson process whose intensity is modeled by a switching Lévy process. This model presents several interesting features. Firstly, as Lévy processes encompass numerous jump processes, our model can duplicate sudden jumps observed in credit spreads. Also, due to the presence of jumps, probabilities do not vanish at very short maturities, contrary to models based on Brownian dynamics. Furthermore, as parameters of the Lévy process are modulated by a hidden Markov chain, our approach is well suited to model changes of volatility trends in credit spreads, related to modifications of unobservable economic factors.
Author: Carol Alexander
Publisher:
ISBN:
Category :
Languages : en
Pages : 27
Get Book Here
Book Description
This paper investigates the determinants of the iTraxx CDS Europe indices, finding strong evidence that they are regime dependent. During volatile periods credit spreads become highly sensitive to stock volatility and more sensitive to this than to stock returns. They are also almost immune to interest rates changes. During tranquil periods credit spreads are more sensitive to stock returns than to volatility and most indices are sensitive to interest rate moves. However for companies in the financial sector interest rates have no significant influence in either regime. We also found some evidence that raising interest rates can decrease the probability of credit spreads entering a volatile period. Our findings are useful for policy makers and, since equity hedge ratios based on single-state models cannot capture the regime dependent behaviour of credit spreads, our results may also help traders to improve the efficiency of hedging credit default swaps. Finally, the volatility clustering and autocorrelation that we have identified in the price dynamics of iTraxx indices should prove useful for pricing the iTraxx options that are now being actively traded over-the-counter.
Author: Heinrich Kick
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
Get Book Here
Book Description
Inspired by the recent literature on rare events and their impact on asset prices, we investigate the return predictability properties of a set of variables related to the risk of tail events extracted from equity market information and measures based on credit spreads. Our variables outperform traditional variables in terms of fit at the monthly prediction horizon. We employ both a linear model as well as a model allowing for structural breaks to obtain a better understanding of the nature of the predictability relationship. We find evidence for pronounced changes in the way the predictor variables relate to future realized returns between normal times and states of crisis, supporting theoretical models that accommodate these changes. The out-of-sample investigations show that when allowing the transition probabilities to depend on a crisis related variable, the regime switching model yields more precise forecasts than any linear model or naive forecasting method considered here. However, the regime switching models do not have a general advantage over linear models due to the difficulties in forecasting the correct future state for longer forecasting horizons, as structural breaks tend to occur suddenly.
