Predicting Credit Spreads

Predicting Credit Spreads

Authors

Published

Journal of Financial Intermediation , 4 ed., vol. 19, pp. 529-63, October (4th Quarter/Autumn) 2010

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. These results have important implications for credit-spreads modeling.