The determinants of credit spread changes of investment grade corporate bonds in Thailand between June 2006 and February 2012

An application of the regime switching model

Abstract

This study proposes the two-state regime-switching model to explain the change of credit spread for investment grade corporate bonds in Thailand. The regimes of low and high volatility are extracted by Markov switching model. The results suggest that the model can improve explanatory power. The sensitivities of the risk factors including interest rate, macroeconomic, and liquidity factors increase in the high volatility regime rather than in the low regime. However, the liquidity factors are not significant for low credit rating corporate bonds.