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A Markov switching unobserved component analysis of the CDX index term premium

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journal contribution
posted on 23.03.2016, 14:45 by Giovanni Calice, Christos Ioannidis, RongHui Miao
Using a Markov switching unobserved component model we decompose the term premium of the North American CDX index into a permanent and a stationary component. We establish that the inversion of the CDX term premium is induced by sudden changes in the unobserved stationary component, which represents the evolution of the fundamentals underpinning the probability of default in the economy. We find evidence that the monetary policy response from the Fed during the crisis period was effective in reducing the volatility of the term premium. We also show that equity returns make a substantial contribution to the term premium over the entire sample period.

History

School

  • Business and Economics

Department

  • Business

Published in

International Review of Financial Analysis

Citation

CALICE, G., IOANNIDIS, C. and MIAO, R.-H., 2016. A Markov switching unobserved component analysis of the CDX index term premium. International Review of Financial Analysis, 44, pp. 189-204.

Publisher

© Elsevier

Version

AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Publication date

2016

Notes

This paper was accepted for publication in the journal International Review of Financial Analysis and the definitive published version is available http://dx.doi.org/10.1016/j.irfa.2016.01.020

ISSN

1057-5219

Language

en

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