Many empirical studies on credit spread determinants consider a single regime model over the entire sample period and …nd limited explanatory power for theoretical determinants of credit spreads. In this paper, we show that accounting for di¤erent regimes enhances the explanatory power of these determinants. We also obtain that credit spreads have their own cycle which is di¤erent from the economic cycle. Then, we model the credit cycle independently from macroeconomic fundamentals using a Markov regime switching model. We …nd that, in contrast to the economic cycle, the introduction of the credit cycle increases the model’s adjusted R-squared to up to 60 % on average for the 10-year AA to BB credit spread changes
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