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By Wolfgang Aussenegg (a (b and Lukas Goetz

Abstract

This paper investigates the determinants of Asset Swap Spreads of European bond indices. Our results suggest that credit spreads display significant regime specific dynamics. During periods of financial crisis spreads are highly sensitive to equity market volatility, while in tranquil periods stock returns explain credit spreads in a better way. The level of interest rates is an important factor in both regimes, while the difference between the swap curve and the government bond yield curve- the swap spread- influences credit spreads in periods of increased volatility. We also find evidence of negative autocorrelation of Asset Swap Spread changes in tranquil periods and positive autocorrelation in the volatile regime. Finally an increasing risk-free rate and positive returns in the stock market may decrease the probability of entering the high volatility regime. JEL classification: C13, C32, G1

Topics: European Bond Indices, Asset Swap Spread, Credit Spreads, Markov Switching
Year: 2009
OAI identifier: oai:CiteSeerX.psu:10.1.1.183.9954
Provided by: CiteSeerX
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