Template-type: ReDIF-Paper 1.0
Author-Name: Marcin Jaskowski
Author-Workplace-Name: Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands.

Author-Name:
 Michael McAleer
Author-Workplace-Name:
 Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of 
	Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of 
	Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.
Title: Spurious Cross-Sectional Dependence in Credit Spread Changes
Abstract: In order to understand the lingering credit risk puzzle and the apparent segmentation of the stock market from credit markets, we need to be able to 
	assess the strength of the cross-sectional dependence in credit spreads. This turns out to be a non-trivial task due to the extreme data sparsity that 
	is typical for any panel of credit spreads that is extracted from corporate bond transactions. The problem of data sparsity has led to some erroneous 
	conclusions in the literature, including inferences that have been drawn from spurious cross-sectional dependence in credit spread changes. 
	Understanding the pitfalls leads to a new and improved estimator of the latent factor in credit spread changes and its characteristics.
Classification-JEL: G12, G13, G17, E43.
Keywords: Credit spread puzzle; Market segmentation; Latent factors; Spurious cross-sectional dependence.
Length: 31 pages 
Creation-Date: 2018-09
Number: 2018-21
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1821.txt
File-URL: https://eprints.ucm.es/id/eprint/49149/1/1821.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1821