On forecasting the term structure of credit spreads

Krishnan, C. N. V.; Ritchken, Peter H.; Thomson, James B.

doi:10.26509/frbc-wp-200705

Working Paper

On forecasting the term structure of credit spreads

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.

Keywords: Corporate bonds; Rate of return;

https://doi.org/10.26509/frbc-wp-200705