Modeling credit spreads - an exploratory study in China

This paper empirically studies the micro and macro factors that influence the dynamic process of credit spreads and builds dynamic regression models for credit spread series of bond with different maturities. It is found that short-term interest rate, the slope of default-free term structure, CPI, the curvature of default-free term structure and exchange rate are important for studying the change and volatility of credit spreads in China. With the maturity different, the effects are different too. Investors and supervisors can forecast the change of credit risk by paying attention to these economic variables.