Predicting Credit Spreads
by C.N.V. Krishnan of Case Western Reserve University,
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 credit-spread 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. Current credit-spread and riskless-yield curves impound essentially all marketwide and firm-specific information necessary for predicting future credit spreads. Our results have important implications for credit-spreads modeling.
Keywords: Term Structure of Credit Spreads, Forecasting Future Credit Spreads.
Published in: Journal of Financial Intermediation, Vol. 19, No. 4, (October 2010), pp. 529-563.