Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality |
| |
| Authors: | MARTIJN BOONS GIORGIO OTTONELLO ROSSEN VALKANOV |
| |
| Institution: | 1. Martijn Boons is with Tilburg University and Nova School of Business and Economics. Giorgio Ottonello is with Nova School of Business and Economics. Rossen Valkanov is with University of California, San Diego. We thank Yuriy Gorodnichenko, Simon Gilchrist, Jim Hamilton, Byoungchan Lee, Yoshio Nozawa, Valerie Ramey, and Egon Zakrajsek for sharing code and/or data. We thank the Editor Stefan Nagel;2. an Associate Editor;3. two anonymous referees;4. and Fernando Anjos;5. Snehal Banergee;6. Jim Hamilton;7. Jens Kværner;8. Jun Liu;9. Tyler Muir;10. Yoshio Nozawa;11. Michael Reher;12. Lukas Schmid;13. Allan Timmermann;14. Egon Zakrajsek;15. and participants at Aarhus University, Bayes Business School, DGF 2021, FIRS 2022, WFA 2022, Nova SBE, Peking University HSBC Business School, SOFIE, Tilburg University, and UCSD for helpful comments. This work was funded by Fundação para a Ciência e a Tecnologia UID/ECO/00124/2013 and Social Sciences DataLab, Project 22209), POR Lisboa (LISBOA-01-0145-FEDER-007722 and Social Sciences DataLab, Project 22209), and POR Norte (Social Sciences DataLab, Project 22209). We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose. |
| |
| 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 countercyclicality is driven largely 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. |
| |
| Keywords: | |
|
|
