Detecting Regime Shifts in Credit Spreads

84 Pages Posted: 16 Jun 2008 Last revised: 11 Mar 2013

See all articles by Olfa Maalaoui

Olfa Maalaoui

Bloomberg L.P.; Korea Advanced Institute of Science and Technology (KAIST) - Graduate School of Finance

Georges Dionne

HEC Montreal - Department of Finance

Pascal Francois

HEC Montreal - Department of Finance

Date Written: March 1, 2013

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.

Keywords: Credit spread regimes, level regimes, volatility regimes, credit cycle, economic cycle, monetary effect, credit supply effect

JEL Classification: G12, E32, E42, E52

Suggested Citation

Maalaoui, Olfa and Maalaoui, Olfa and Dionne, Georges and Francois, Pascal, Detecting Regime Shifts in Credit Spreads (March 1, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1146583 or http://dx.doi.org/10.2139/ssrn.1146583

Olfa Maalaoui (Contact Author)

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

Korea Advanced Institute of Science and Technology (KAIST) - Graduate School of Finance ( email )

Bloomberg L.P.
731 Lexington Ave
NY, NY 10022
United States

Georges Dionne

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Pascal Francois

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

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