Avino, Davide and Nneji, Ogonna (2012): Are CDS spreads predictable? An analysis of linear and non-linear forecasting models.
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This paper investigates the forecasting performance for CDS spreads of both linear and non-linear models by analysing the iTraxx Europe index during the financial crisis period which began in mid-2007. The statistical and economic significance of the models’ forecasts are evaluated by employing various metrics and trading strategies, respectively. Although these models provide good in-sample performances, we find that the non-linear Markov switching models underperform linear models out-of-sample. In general, our results show some evidence of predictability of iTraxx index spreads. Linear models, in particular, generate positive Sharpe ratios for some of the strategies implemented, thus shedding some doubts on the efficiency of the European CDS index market.
|Item Type:||MPRA Paper|
|Original Title:||Are CDS spreads predictable? An analysis of linear and non-linear forecasting models|
|Keywords:||Credit default swap spreads; iTraxx; Forecasting; Markov switching; Market efficiency; Technical trading rules|
|Subjects:||C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Davide Avino|
|Date Deposited:||28. Nov 2012 13:14|
|Last Modified:||12. Feb 2013 14:19|
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