Predicting Credit Spreads
54 Pages Posted: 26 Jun 2007 Last revised: 3 Nov 2008
Date Written: February 5, 2008
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: Suggested Citation