Do credit markets respond to macroeconomic shocks? The case for reverse causality

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
JournalJournal of Finance
DOIs
Publication statusAccepted/In press - 8 Oct 2022

Keywords

  • Credit spreads
  • Time-Varying Risk Premia
  • Macroeconomic risk
  • Shocks
  • Return Predictability

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