Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components
October 1, 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.
Subject: Bonds, Corporate bonds, Financial institutions, Financial services, Industrial production, Production, Securities, Yield curve
Keywords: AAA-rated bond, Bonds, business cycle, coefficients estimate, commercial paper, Corporate bonds, corporate spreads, forecasting, GMM estimation, growth rate, Industrial production, Investment grade bonds, Markov process, maturity bond index, number of lag, numbers in parenthesis, principal components analysis, regime-switching, Securities, systematic risk, United States, WP, Yield curve
Pages:
62
Volume:
2001
DOI:
Issue:
158
Series:
Working Paper No. 2001/158
Stock No:
WPIEA1582001
ISBN:
9781451857580
ISSN:
1018-5941
