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| Predicting Credit Spreads by C.N.V. Krishnan of Case Western Reserve University, June 19, 2007 Abstract: Predictions of firm-level credit spreads based on the current spot and forward credit spreads can be significantly improved upon by using the information contained in the shape of the credit-spread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future out-of-sample credit spreads; the explanatory power can be further significantly increased 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. Our findings have significant implications for establishing theoretical models of credit spreads in future. Keywords: Term Structure of Credit Spreads, Forecasting Future Credit Spreads. Download paper (498K PDF) 50 pages
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