Publication
Do credit markets respond to macroeconomic shocks?
| Summary: | The response of corporate bond credit spreads to three exogenous macro-shocks -- oil supply, investment-specific technology, and government spending -- is large, significant, and a mirror image of macroeconomic activity. This counter-cyclicality is largely driven by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro-shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy. |
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| Main Authors: | Boons, Martijn |
| Other Authors: | Ottonello, Giorgio; Valkanov, Rossen |
| Subject: | Credit spreads Time-Varying Risk Premia Macroeconomic risk Shocks Return Predictability |
| Year: | 2023 |
| Country: | Portugal |
| Document type: | article |
| Access type: | open access |
| Associated institution: | Universidade Nova de Lisboa |
| Language: | English |
| Origin: | Repositório Institucional da UNL |
| Summary: | The response of corporate bond credit spreads to three exogenous macro-shocks -- oil supply, investment-specific technology, and government spending -- is large, significant, and a mirror image of macroeconomic activity. This counter-cyclicality is largely driven by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro-shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy. |
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