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Spurious Cross-Sectional Dependence in Credit Spread Changes

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Jaskowski, Marcin and McAleer, Michael (2018) Spurious Cross-Sectional Dependence in Credit Spread Changes. [ Documentos de Trabajo del ICAE; nº 21, 2018, ISSN: 2341-2356 ] (Unpublished)

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Abstract

In order to understand the lingering credit risk puzzle and the apparent segmentation of the stock market from credit markets, we need to be able to assess the strength of the cross-sectional dependence in credit spreads. This turns out to be a non-trivial task due to the extreme data sparsity that is typical for any panel of credit spreads that is extracted from corporate bond transactions. The problem of data sparsity has led to some erroneous conclusions in the literature, including inferences that have been drawn from spurious cross-sectional dependence in credit spread changes. Understanding the pitfalls leads to a new and improved estimator of the latent factor in credit spread changes and its characteristics.


Item Type:Working Paper or Technical Report
Additional Information:

Acknowledgments: For financial and research support, the second author wishes to thank the Australian Research Council
and the Ministry of Science and Technology (MOST), Taiwan.

Uncontrolled Keywords:Credit spread puzzle; Market segmentation; Latent factors; Spurious cross-sectional dependence.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Finance
JEL:G12, G13, G17, E43
Series Name:Documentos de Trabajo del ICAE
Volume:2018
Number:21
ID Code:49149
Deposited On:17 Sep 2018 11:49
Last Modified:17 Sep 2018 11:49

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