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On Forecasting the Term Structure of Credit Spreads


Predictions of firm-by-firm term structures of credit spreads based on current spot and forward values can be improved upon by exploiting information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future credit spreads; the explanatory power can be increased further by exploiting information contained in the shape of the riskless-yield curve. In the presence of credit-spread and riskless factors, other macroeconomic, marketwide, and firm-specific risk variables do not significantly improve predictions of credit spreads. Current credit-spread and riskless-yield curves impound essentially all marketwide and firm-specific information necessary for predicting future credit spreads.

JEL code: G12

Key words: Term structure of credit spreads; forecasting future credit spreads


Suggested citation: Krishnan, C.N.V., Peter H. Ritchken, and James B. Thomson, 2007. "On Forecasting the Term Structure of Credit Spreads," Federal Reserve Bank of Cleveland, Working Paper no. 07-05.

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