Macro risk factors of credit default swap indices in a regime-switching framework

Kam Fong Chan, Alastair Marsden

Research output: Contribution to journalArticle

17 Citations (Scopus)


Using the Markov regime-switching model, this paper examines factor loadings on macroeconomic, market sentiment and other variables that may explain North American investment-grade and high-yield credit default swap indices (CDX) over the period 2003-2011. In both crisis and tranquil market states, spreads are positively related to the market-wide default premium and VIX, and negatively related to changes in Treasury bond yields, the underlying stock index returns and the Fama-French's High-Minus-Low factor. The magnitude of the factor loadings is higher during crisis periods. The results suggest the need to consider regime dependent hedge ratios to manage credit risk exposure.

Original languageEnglish
Pages (from-to)285-308
Number of pages24
JournalJournal of International Financial Markets, Institutions and Money
Publication statusPublished - Mar 2014
Externally publishedYes


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