Spurious cross-sectional dependence in credit spread changes

Marcin Jaskowski; Michael McAleer

doi:10.1016/j.ecosta.2019.09.001

Spurious cross-sectional dependence in credit spread changes

Marcin Jaskowski, Michael McAleer^*

^*Corresponding author for this work

Econometrics

Research output: Contribution to journal › Article › Academic › peer-review

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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 improved estimation of the latent factor in credit spread changes and its characteristics.

Original language	English
Pages (from-to)	12-27
Number of pages	16
Journal	Econometrics and Statistics
Volume	18
DOIs	https://doi.org/10.1016/j.ecosta.2019.09.001
Publication status	Published - Apr 2021

Bibliographical note

JEL classification: G12, G13, G17, E43

Acknowledgments:
The authors are most grateful to the Associate Editor and two reviewers for very helpful comments and suggestions. For financial and research support, the second author wishes to thank the Australian Research Council and the Ministry of Science and Technology (MOST), Taiwan.

Publisher Copyright:
© 2019 EcoSta Econometrics and Statistics

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10.1016/j.ecosta.2019.09.001

1-s2.0-S2452306219300619-mainFinal published version, 1.27 MBLicence: Article 25fa Dutch Copyright Act

Cite this

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Spurious cross-sectional dependence in credit spread changes

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