The Relationship Between Firm Level Fundamentals and Credit Index Returns

Abstract

We examine the relationship between the returns of US Credit Default Indices and the fundamental financial data of their underlying companies for the post-crisis period of 2009-2017. Using linear regression and vector autoregression methods we investigate both the contemporaneous correlations and the lead-lag relations between fundamentals and index returns. Our main findings are that financial fundamentals have a small explanatory power over the indices, which however increases substantially upon the inclusion of exogenous control parameters, and that intertemporal (lead-lag) correlations are statistically significant and quite robust. We also propose potential explanations for the results as well as possible directions for further study.