Predicting Credit Spreads

54 Pages Posted: 26 Jun 2007 Last revised: 3 Nov 2008

See all articles by Peter H. Ritchken

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

James B. Thomson

University of Akron

Date Written: February 5, 2008

Abstract

Predictions of firm-level credit spreads based on the current spot and forward credit spreads can be significantly improved upon by using the information contained in the shape of the creditspread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future out-of-sample credit spreads; predictions can be significantly improved upon by exploiting the information contained in the shape of the riskless yield curve. In the presence of credit-spread and riskless factors, other macroeconomic, marketwide, and firm-specific risk variables do not significantly improve predictions of credit spreads. These results have important implications for credit-spreads modeling.

Keywords: Term Structure of Credit Spreads, Level, Slope, and Curvature of Credit Spreads, Forecasting Future Credit Spreads, Out of sample Predictions, Macro Variables, Firm Risk Variables

JEL Classification: G14

Suggested Citation

Ritchken, Peter H. and Krishnan, C. N. V. and Thomson, James B., Predicting Credit Spreads (February 5, 2008). Available at SSRN: https://ssrn.com/abstract=970997 or http://dx.doi.org/10.2139/ssrn.970997

Peter H. Ritchken (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

James B. Thomson

University of Akron ( email )

Akron, OH 44325-4803
United States

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