Modelling credit spreads with time volatility, skewness, and kurtosis

Clark, Ephraim A. and Selima, Baccar (2018) Modelling credit spreads with time volatility, skewness, and kurtosis. Annals of Operations Research, 262 (2). pp. 431-461. ISSN 0254-5330

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Abstract

This paper seeks to identify the macroeconomic and financial factors that drive credit spreads on bond indices in the US credit market. To overcome the idiosyncratic nature of credit spread data reflected in time varying volatility, skewness and thick tails, it proposes asymmetric GARCH models with alternative probability density functions. The results show that credit spread changes are mainly explained by the interest rate and interest rate volatility, the slope of the yield curve, stock market returns and volatility, the state of liquidity in the corporate bond market and, a heretofore overlooked variable, the foreign exchange rate. They also confirm that the asymmetric GARCH models and Student-t distributions are systematically superior to the conventional GARCH model and the normal distribution in in-sample and out-of-sample testing.

Item Type: Article
Research Areas: A. > Business School > Accounting and Finance
Item ID: 18479
Notes on copyright: Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
Depositing User: Sasha Antoni
Date Deposited: 23 Nov 2015 10:26
Last Modified: 07 Nov 2018 08:43
URI: http://eprints.mdx.ac.uk/id/eprint/18479

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