Corporate Bond Spreads and the Business Cycle
- Topics:
- Equity
- Tags:
- Bond,
- Finance,
- Investment,
- Spread
- Source:
- Bank of Canada
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Overview: 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. 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 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.
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Format: HTML | Size: 312KB | Pages: 37
