Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and their Systematic Components

 
Author/Editor: Chan-Lau, Jorge A. ; Ivaschenko, Iryna V.
 
Publication Date: October 01, 2001
 
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Summary: This paper finds that the yield spread of investment-grade bonds relative to Treasuries, a proxy of default risk, predicts marginal changes in industrial production in the United States up to 12 months in the future, even upon controlling for a commonly used predictor such as the commercial paper spread. The paper also finds that systematic risk factors associated with the yield spread of investment-grade bonds to a variety of risk-free benchmarks - Treasuries, agency bonds, and AAA-rated bonds - have significant predictive content for future growth rate of industrial production at 3 to 18 months forecasting horizon, both in- and out-of-sample. Finally, a regime-switching estimation shows that the systematic risk component is also able to capture "industrial production business cycle" well.
 
Series: Working Paper No. 01/158
Subject(s): Bonds | Investment | United States | Economic models

Author's Keyword(s): Investment grade bonds | corporate spreads | business cycle | forecasting | GMM estimation | systematic risk
 
English
Publication Date: October 01, 2001
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA1582001 Pages: 62
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