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On forecasting the term structure of credit spreads

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  • C. N. V. Krishnan
  • Peter H. Ritchken
  • James B. Thomson

Abstract

Predictions of firm-by-firm term structures of credit spreads based on current spot and forward values can be improved upon by exploiting information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future credit spreads; the explanatory power can be increased further by exploiting 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.

Suggested Citation

  • C. N. V. Krishnan & Peter H. Ritchken & James B. Thomson, 2007. "On forecasting the term structure of credit spreads," Working Papers (Old Series) 0705, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0705
    DOI: 10.26509/frbc-wp-200705
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    Keywords

    Corporate bonds; Rate of return;

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