Double Diamond Investors - Fuqua School of Business

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Transcript Double Diamond Investors - Fuqua School of Business

Double  Diamond
Investors
Predicting Credit Spreads
Doug Carson
Joe Franke
Jim Gereghty
Fran Mulvey
Jamie Vogel
Double  Diamond
Double  Diamond
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Introduction
Variables
Methodology
Results
Double  Diamond
Introduction
• Credit Spreads
Yield on
Corporate
Bond
Yield on
US Treasury
Firm Specific Risk
Systematic Risk
Double  Diamond
Introduction
Double  Diamond
Double  Diamond
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Introduction
Variables
Methodology
Results
Double  Diamond
Variables
Variable
Source
Explanation
Treasury to
Eurodollar Spreads
Datastream
Used as a proxy for the US credit rating.
S&P 500 Composite Datastream
Index
Measure of the direction of the equity
market.
S&P 500 Volatility
Datastream
Measure of the volatility of the equity
market.
Treasury Note and
Bond Volatility
Datastream
Measure of the volatility of the short and
long-term interest rates
Yield Curve
Changes
Datastream
Measure of interest rates in the future
Double  Diamond
Variables
Variable
Source
Explanation
Swap Rates
Datastream
Used as a proxy for the AA credit rate
Industrial Production Bloomberg
Used as a forward indicator of GDP
growth
Consumer
Confidence
Datastream
Used as proxy for consumer perception
of the economic cycle
S&P 500 Dividend
Yield
Datastream
Used as an indicator of future equity
market growth.
Lagged Credit
Spreads
Datastream, Used to predict current credit spreads.
Bloomberg
Double  Diamond
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Introduction
Variables
Methodology
Results
Double  Diamond
Methodology
• Used 3 Dependent Variables
– Datastream Aggregate
– Bloomberg AAA, 10-year Index
– Bloomberg BBB, 10-year Index
• Regressed against independent
variables (in-sample)
Double  Diamond
Methodology
• Found multi-factor model for each credit
spread
– Datastream Aggregate: 7-factor
– Bloomberg AAA, 10-year: 5-factor
– Bloomberg BBB, 10-year: 7-factor
• Used multi-factor model from the insample periods to forecast the out-ofsample periods for each variable
Double  Diamond
Double  Diamond
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Introduction
Variables
Methodology
Results
Double  Diamond
Results
Adjusted R2
In-sample
hit rate
Out-of-sample
hit rate
Datastream
Aggregate Bloomberg AAA Bloomberg BBB
23.89
29.78
18.92
63.37%
73.44%
52.38%
64.00%
82.14%
71.43%
Double  Diamond
Double Diamond
Double  Diamond