|
Archive@NYU >
Stern School of Business >
Salomon Center >
Credit & Debt Markets >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26753
|
| Title: | An Econometric Model of Credit Spreads with Rebalancing, ARCH and Jump Effects |
| Authors: | Bierens, Herman
Huang, Jing-zhi
Kong, Weipeng |
| Keywords: | Credit risk
corporate bonds
credit spread index
index rebalancing
jumps |
| Issue Date: | 8-Apr-2003 |
| Series/Report no.: | S-CDM-03-07 |
| Abstract: | In this paper, we examine the dynamic behavior of credit spreads on
corporate bond portfolios. We propose an econometric model of credit
spreads that incorporates portfolio rebalancing, the near unit root
property of spreads, the autocorrelation in spread changes, the ARCH
conditional heteroscedasticity, jumps, and lagged market factors. In
particular, our model is the first that takes into account explicitly
the impact of rebalancing and yields estimates of the absorbing bounds
on credit spreads induced by such rebalancing. We apply our model to
nine Merrill Lynch daily series of option-adjusted spreads with ratings
from AAA to C for the period January 1997 through August 2002. We find
no evidence of mean reversion in these credit-spread series over our
sample period. However, we find ample evidence of both the ARCH effect
and jumps in the data especially in the investment-grade credit spread
indices. Incorporating jumps into the ARCH type conditional variance
results in significant improvements in model diagnostic tests. We also
find that while log spread variations depend on both the lagged Russell
2000 index return and lagged changes in the slope of the yield curve,
the time-varying jump intensity of log credit spreads is correlated with
the lagged stock market volatility. Finally, our results indicate the
ARCH-jump specification outperforms the ARCH specification in the
out-of-sample, one-step-ahead forecast of credit spreads. |
| URI: | http://hdl.handle.net/2451/26753 |
| Appears in Collections: | Credit & Debt Markets
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
