Corporate Bond Spreads and the Business Cycle
نویسنده
چکیده
This paper examines the predictive power of credit spreads from the corporate bond market. The high-yield bond spread and investment-grade spread can explain 68 per cent and 42 per cent of output variations one year ahead, while the term spread based on government debts can explain only 12 per cent of them. For output forecasts up to one year ahead, the corporate bond spreads also outperform popular indicators such as the paper-bill spread, federal funds rate, consumer sentiment index, Conference Board leading indicator, and the Standard & Poor’s index both insample and out-of-sample. The forecasts from the high-yield spread are more accurate than those from the investment-grade spreads. For forecasts beyond the one-year horizon, the term spread and the federal funds rate dominate the corporate spreads. The author finds that linear models based on stock market movements, the risk-free short rate, and the term spread can explain only 7 per cent of the variations in the high-yield spread. The credit channel theory in monetary economics suggests that the functional form should be non-linear. Statistical tests reject the linearity assumption for both corporate spreads in favour of a threshold non-linear specification that is consistent with the credit channel theory. The threshold models explain 63 per cent of the variations in the high-yield spread and 75 per cent of the variations in the investment-grade spread. JEL classification: E3, E5, G1 Bank classification: Financial markets; Monetary and financial indicators; Transmission of monetary policy
منابع مشابه
Credit spreads, daily business cycle, and corporate bond returns predictability∗
The part of credit spread that is not explained by corporate credit risk forecasts future economic activity. I show that the link with aggregate business risk and bond liquidity risk explains this finding. Once I project spreads on these two risk factors, which are readily measurable with the daily frequency, in addition to corporate credit risk, the forecasting power of the residual spread red...
متن کاملTreasury yields and corporate bond yield spreads: An empirical analysis
This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I nd that noncallable bond yield spreads fall when the level of the Treasury term structure rises. The extent of this decline depends on the initial credit quality of the bond; the decline is small for Aaarated bonds and large for Baa-rated bond...
متن کاملCredit Risk and Disaster Risk
Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while fairly safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small,...
متن کاملInternal Liquidity Risk in Corporate Bond Credit Spreads
The determinants of a substantial portion of bond credit spreads remain puzzled in literature. Through investigating corporate bond credit spreads from year 2000 to 2005, we find that corporate internal liquidity still significantly impacts on corporate bond credit spreads when controlling other well-known variables stated in literature. Additionally, we also find that there is a systematic int...
متن کاملHow Should The Entrepreneurs OfSMEs In Iran Change Their Style In a Business Life Cycle
Kambeiz Talebi, the author of the Article discusses the urgent needfor topmanagers to change their style in small entrepreneurial firms during a business life cycle. Although most leadership theories assume that it is an easy task, but the case studies and practical experience suggest the opposite - managers find it hard to move from an innovative style when the company is young to taskoriente...
متن کامل