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Are CDS spreads predictable during the Covid-19 pandemic? Forecasting based on SVM, GMDH, LSTM and Markov switching
Darko B Vukovic1,2, Kirill Romanyuk3, Sergey Ivashchenko4,5,6
1International Laboratory for Finance and Financial Markets, Faculty of Economics, People's Friendship University of Russia (RUDN University), 117198, Miklukho-Maklaya str. 6, Moscow, Russia.
Abstract:
This paper investigates the forecasting performance for credit default swap (CDS) spreads by Support Vector Machines (SVM), Group Method of Data Handling (GMDH), Long Short-Term Memory (LSTM) and Markov switching autoregression (MSA) for daily CDS spreads of the 513 leading US companies, in the period 2009-2020. The goal of this study is to test the forecasting performance of these methods before and during the Covid-19 pandemic and to check whether there are changes in the market efficiency. MSA outperforms all other methods most frequently. GMDH breaks the efficient market hypothesis more frequently (75%) than other methods. The change of the relative predictability during Covid-19 is small with some increase of the advantage of the investigated methods over a benchmark. We find that the market has been less efficient during Covid-19, however, there are no huge differences in prediction performances before and during the Covid-19 period.
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