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Credit Spreads, Business Conditions, and Expected Corporate Bond Returns

Author

Listed:
  • Hai Lin

    (School of Economics and Finance, Victoria University of Wellington, Wellington 6140, New Zealand)

  • Xinyuan Tao

    (Martin Tuchman School of Management, New Jersey Institute of Technology, Newark, NJ 07102, USA)

  • Junbo Wang

    (Department of Economics and Finance, City University of Hong Kong, 220, Hong Kong, China)

  • Chunchi Wu

    (School of Management, State University of New York at Buffalo, Buffalo, NY 14260, USA)

Abstract

Using an aggregate credit spread index, we find that it has substantial predictive power for corporate bond returns over short and long horizons. The return predictability is economically and statistically significant and robust to various controls. The credit spread index and its components have more predictive power for bond returns than conventional default and term spreads. When decomposing the credit spread index into investment- and speculative-grade components, the latter has more predictive power for future bond returns. The source of the index’s predictive power is from its ability to forecast future economic conditions.

Suggested Citation

  • Hai Lin & Xinyuan Tao & Junbo Wang & Chunchi Wu, 2020. "Credit Spreads, Business Conditions, and Expected Corporate Bond Returns," JRFM, MDPI, vol. 13(2), pages 1-34, January.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:2:p:20-:d:311789
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