From Macroeconomic Shocks to Credit Spreads
2021-03-03 09:39:54

We estimate the response of corporate bond credit spreads to three exogenous shocks: oil supply, investment-specific technology, and government spending. Credit spreads respond significantly to these macroeconomic shocks; the response is similar in magnitude, opposite in sign, and with a slight lag relative to the response of macroeconomic activity. We argue that the lagged counter-cyclical response of credit spreads is to a large extent driven by time-varying credit risk premia, which translates into significant predictability in corporate bond returns. Standard proxies for equity risk premia exhibit similar responses, which provides external validity to this argument. Our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy and, more generally, how macroeconomic shocks propagate in financial markets.