Predictive effect of economic and market variations on structural breaks in credit market

Wednesday, February 21, 2018 - 9:10am - 9:50am
Lind 305
Haipeng Xing (State University of New York, Stony Brook (SUNY))
The financial crisis of 2007-2008 has caused severe economic and
political consequences over the world. An interesting question from this
crisis is whether or to what extent such sharp changes or structural
breaks in the market can be explained by economic and market fundamentals.
To address this issue, we consider a model that extracts the information
of market structural breaks from firms' credit rating records, and
connects probabilities of market structural breaks to observed and latent
economic variables. We also discuss the issue of selecting significant
variables when the number of economic covariates is large. We then
analyze market structural breaks that involve U.S. firms' credit rating
records and historical data of economic and market fundamentals from 1986
to 2015. We find that the probabilities of structural breaks are
positively correlated with changes of S\&P500 returns and volatilities and
changes of inflation, and negatively correlated with changes of corporate
bond yield. The significance of other variables depends on the inclusion
of latent variables in the study or not.