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Default and liquidity regimes in the bond market during the 2002–2012 period
Author(s) -
Dionne Georges,
Chun Olfa Maalaoui
Publication year - 2013
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12057
Subject(s) - market liquidity , economics , recession , monetary economics , predictive power , credit risk , bond market , bond , itraxx , credit valuation adjustment , persistence (discontinuity) , credit crunch , credit default swap index , econometrics , financial system , keynesian economics , finance , credit reference , philosophy , geotechnical engineering , epistemology , engineering
Using a real‐time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002–2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain the predictive power of credit risk on the 2007–2009 NBER recession, whereas the default regime drives the persistence of credit spreads over the same recession. Our results complement the recent dynamic structural models as well as monetary and credit supply effects models by empirically supporting two important patterns in credit spreads: the persistence and the predictive ability toward economic downturns.