TY - JOUR

T1 - A Markov switching unobserved component analysis of the CDX index term premium

AU - Calice, G

AU - Ioannidis, C

AU - Miao, RH

PY - 2016/3

Y1 - 2016/3

N2 - 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. (C) 2016 Elsevier Inc. All rights reserved.

AB - 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. (C) 2016 Elsevier Inc. All rights reserved.

U2 - 10.1016/j.irfa.2016.01.020

DO - 10.1016/j.irfa.2016.01.020

M3 - Article

VL - 44

SP - 189

EP - 204

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

ER -