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.
Krishnan, C.N.V., Peter Ritchken, and James B. Thomson. 2007. “On Forecasting the Term Structure of Credit Spreads” Federal Reserve Bank of Cleveland, Working Paper No. 07-05. https://doi.org/10.26509/frbc-wp-200705