Template-Type: ReDIF-Paper 1.0
Author-Name: Jaskowski, M.
Author-Name-Last: Jaskowski
Author-Name-First: Marcin
Author-Name: McAleer, M.J.
Author-Name-Last: McAleer
Author-Name-First: Michael
Author-Person: pmc90
Title: Spurious Cross-Sectional Dependence in Credit Spread Changes
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.
Length: 30
Creation-Date: 2018-08-01
File-URL: https://repub.eur.nl/pub/110016/EI2018-34.pdf
File-Format: application/pdf
Series: RePEc:ems:eureir
Number: EI 208-34
Classification-JEL: G12, G13, G17, E43
Keywords: Credit spread puzzle, Market segmentation, Latent factors, Spurious cross-sectional dependence
Handle: RePEc:ems:eureir:110016