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Detecting Regime Shifts in Credit Spreads

Published online by Cambridge University Press:  08 April 2015

Olfa Maalaoui Chun ,
Georges Dionne  and
Pascal François
Olfa Maalaoui Chun
Affiliation:
[email protected], Graduate School of Finance, KAIST, 87 Hoegiro, Dongdamoongu, Seoul 130-722, South Korea
Georges Dionne
Affiliation:
[email protected], HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montréal, Québec H3T 2A7, Canada.
Pascal François
Affiliation:
[email protected], HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montréal, Québec H3T 2A7, Canada.
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Abstract

Using an innovative random regime shift detection methodology, we identify and confirm two distinct regime types in the dynamics of credit spreads: a level regime and a volatility regime. The level regime is long lived and shown to be linked to Federal Reserve policy and credit market conditions, whereas the volatility regime is short lived and, apart from recessionary periods, detected during major financial crises. Our methodology provides an independent way of supporting structural equilibrium models and points toward monetary and credit supply effects to account for the persistence of credit spreads and their predictive power over the business cycle.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1339 - 1364
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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