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Modeling Corporate CDS Spreads Using Markov Switching Regressions

Author

Listed:
  • Baltodano López Ovielt
  • Bulfone Giacomo
  • Casarin Roberto

    (Department of Economics, Ca’ Foscari University of Venice, Venice, Italy)

  • Ravazzolo Francesco

    (Free University of Bozen-Bolzano, Bolzano, Italy)

Abstract

This paper investigates the determinants of the European iTraxx corporate CDS index considering a large set of explanatory variables within a Markov switching model framework. The influence of financial and economic variables on CDS spreads are compared using linear, two, three, and four-regime models in a sample post-subprime financial crisis up to the COVID-19 pandemic. Results indicate that four regimes are necessary to model the CDS spreads. The fourth regime was activated during the COVID-19 pandemic and in high volatility periods. Further, the effect of the covariates differs significantly across regimes. Brent and term structure factors became relevant after the outbreak of the COVID-19 pandemic.

Suggested Citation

  • Baltodano López Ovielt & Bulfone Giacomo & Casarin Roberto & Ravazzolo Francesco, 2024. "Modeling Corporate CDS Spreads Using Markov Switching Regressions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(2), pages 271-292, April.
    • Handle: RePEc:bpj:sndecm:v:28:y:2024:i:2:p:271-292:n:5
    DOI: 10.1515/snde-2022-0106
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    More about this item

    Keywords

    corporate CDS index; Markov switching; Bayesian econometrics;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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