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Treasury yields and credit spread dynamics: A regime-switching approach

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  • Georgoutsos, Dimitris
  • Kounitis, Thomas

Abstract

The purpose of this paper is to shed new light on the conflicting empirical evidence on the relationship between credit spreads and Treasury rates. Following a general-to-specific modeling approach, we were unable to accept the presence of a long-run relationship between Baa credit spreads and long-term Treasury rates. At the same time, and in support of the structural models on credit risk modeling, a negative short-run relationship was obtained by means of impulse response functions. Subsequently, by employing a regime-switching estimation technique, we were able to establish the importance of the Treasury yield curve slope for the Baa credit spread determination in periods characterized by low interest rate volatility. Finally, we were able to provide evidence of an asymmetric response of the Baa credit spread to term spread changes according to the source of these changes, i.e. short or long term Treasury rates.

Suggested Citation

  • Georgoutsos, Dimitris & Kounitis, Thomas, 2016. "Treasury yields and credit spread dynamics: A regime-switching approach," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 39-51.
    • Handle: RePEc:eee:joecas:v:14:y:2016:i:pa:p:39-51
    DOI: 10.1016/j.jeca.2016.07.010
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    Cited by:

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    2. Li, Xiao-Lin & Li, Xin & Si, Deng-Kui, 2020. "Asymmetric determinants of corporate bond credit spreads in China: Evidence from a nonlinear ARDL model," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Credit spreads; Term spreads; Regime shifts;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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