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The Relation between the High-Yield Bond Spread and the Unemployment Rate in the Euro Area

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  • Kiss, Tamás
  • Nguyen, Hoang
  • Österholm, Pär

Abstract

In this paper, we study the relation between the high-yield bond spread and the unemployment rate in the euro area. This is done using Bayesian VAR models with stochastic volatility. The models are estimated assuming both Gaussian and non-Gaussian distributions for the error terms. Analysing data ranging from January 1998 to December 2020, our results show that an increase in the high-yield bond spread increases the unemployment rate. In terms of the specification of the models, we find that Gaussian error terms are preferred. Our findings hence lend support for the large body of previous literature relying on a Gaussianity assumption in their modelling frameworks.

Suggested Citation

  • Kiss, Tamás & Nguyen, Hoang & Österholm, Pär, 2022. "The Relation between the High-Yield Bond Spread and the Unemployment Rate in the Euro Area," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321003688
    DOI: 10.1016/j.frl.2021.102365
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    More about this item

    Keywords

    Bayesian VAR; Heavy tails; Non-Gaussian error terms;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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