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A Markov switching unobserved component analysis of the CDX index term premium


Reference:

Calice, G., Ioannidis, C. and Miao, R. H., 2016. A Markov switching unobserved component analysis of the CDX index term premium. International Review of Financial Analysis, 44, pp. 189-204.

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Official URL:

http://dx.doi.org/10.1016/j.irfa.2016.01.020

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Abstract

Using a Markov switching unobserved component model we decompose the term premium of the North American CDX index into a permanent and a stationary component. We establish that the inversion of the CDX term premium is induced by sudden changes in the unobserved stationary component, which represents the evolution of the fundamentals underpinning the probability of default in the economy. We find evidence that the monetary policy response from the Fed during the crisis period was effective in reducing the volatility of the term premium. We also show that equity returns make a substantial contribution to the term premium over the entire sample period.

Details

Item Type Articles
CreatorsCalice, G., Ioannidis, C. and Miao, R. H.
DOI10.1016/j.irfa.2016.01.020
Related URLs
URLURL Type
http://www.scopus.com/inward/record.url?scp=84959140085&partnerID=8YFLogxKUNSPECIFIED
Uncontrolled Keywordscdx index,markov switching,state space,term premium,variance decomposition
DepartmentsSchool of Management
Faculty of Humanities & Social Sciences > Economics
RefereedYes
StatusPublished
ID Code49832

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