Detecting Regime Shifts in Credit Spreads
84 Pages Posted: 16 Jun 2008 Last revised: 11 Mar 2013
Date Written: March 1, 2013
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.
Keywords: Credit spread regimes, level regimes, volatility regimes, credit cycle, economic cycle, monetary effect, credit supply effect
JEL Classification: G12, E32, E42, E52
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