A1236
Title: Decomposing the term structure of credit spreads and predicting the macroeconomy in Japan
Authors: Takeshi Kobayashi - NUCB Business School (Japan) [presenting]
Abstract: The purpose is to extract the common factors from the term structure of firm-based credit spreads of Japanese corporate bonds and examine the predictive content of the credit spread on the real economy. The dynamic Nelson-Siegel model is extended to allow for both common level, slope and curvature and firm-specific factors. The credit quality factors are also considered, which capture the difference between high-level and low-level credit spreads. The result shows that the estimated common and credit quality factors are important drivers of firm-based credit spreads and have substantial predictive power for future economic activity. The contribution to the literature is examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.
