Macro factors in the term structure of credit spreads
By: by Jeffery D. Amato and Maurizio Luisi
Contributors: Maurizio, Luisi; Bank for International Settlements. Monetary and Economic Department
Series: BIS working papers -- no. 203; BIS working papers (Online) -- no. 203.
Publisher: Bank for International Settlements
Published: 2006
Place of publication: Basel, Switzerland
Language: eng
Format: [electronic resource] /
Description: We estimate arbitrage-free term structure models of US Treasury yields and spreads on BBB and B rated corporate bonds in a doubly-stochastic intensity-based framework. A novel feature of our analysis is the inclusion of macroeconomic variables -- indicators of real activity, inflation and financial conditions -- as well as latent factors, as drivers of term structure dynamics. Our results point to three key roles played by macro factors in the term structure of spreads: they have a significant impact on the level, and particularly the slope, of the curves; they are largely responsible for variation in the prices of systematic risk; and speculative grade spreads exhibit greater sensitivity to macro shocks than high grade spreads. In addition to estimating risk-neutral default intensities, we provide estimates of physical default intensities using data on Moody's KMV EDFs as a forward--looking proxy for default risk. We find that the real and financial activity indicators, along with filtered estimates of the latent factors from our term structure model, explain a large portion of the variation in EDFs across time. Furthermore, measures of the price of default event risk implied by estimates of physical and risk-neutral intensities indicate that compensation for default event risk is countercyclical, varies widely across the cycle, and is higher on average and more variable for higher-rated bonds.
Notes: Title from PDF file (viewed on May 31, 2006).

"Monetary and Economic Department."

"March 2006."

Includes bibliographical references.

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