The Term Structure of Credit Spreads and the Economic Activity

The Term Structure of Credit Spreads and the Economic Activity
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We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated 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. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs"!as a forward-looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs"!across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher- rated bonds.


The Term Structure of Credit Spreads and the Economic Activity
Language: en
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Authors:
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Type: BOOK - Published: - Publisher:

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We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B-rated corporate bonds in a doubly- stochastic intensity-based fr
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Language: en
Pages: 72
Authors: Philippe Mueller
Categories:
Type: BOOK - Published: 2011 - Publisher:

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This paper explores the transmission of credit conditions into the real economy. Specifically, I examine the forecasting power of the term structure of credit s
The Term Structure of Interest Rates and Macro Economy
Language: en
Pages:
Authors: Evangelos Salachas
Categories:
Type: BOOK - Published: 2015 - Publisher:

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In this paper we extract the factors that shape the yield curve and we relate them with macroeconomy. We examine whether the term structure can predict future e
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Language: en
Pages: 72
Authors: Marco Sorge
Categories: Credit
Type: BOOK - Published: 2004 - Publisher:

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Macro Factors in the Term Structure of Credit Spreads
Language: en
Pages: 72
Authors: Jeffery D. Amato
Categories: Corporate bonds
Type: BOOK - Published: 2006 - Publisher:

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We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based fra