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Double Diamond Investors Predicting Credit Spreads Doug Carson Joe Franke Jim Gereghty Fran Mulvey Jamie Vogel Double Diamond Double Diamond • • • • 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 • • • • 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 Double Diamond • • • • 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 • • • • 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