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The Dynamics of the Credit Spread and Monetary Policy

Author

Listed:
  • Inwon Jang

    (Inwon Jang is at the Deparment of Finance, Girard School of Business, Merrimack College, Boston, US.)

  • David Kim

    (David Kim is at the Economics Department, The University of Sydney, Sydney NSW 2006, Australia, e-mail: d.kim@econ.usyd.edu.au.)

Abstract

This paper empirically examines the aggregate determinants of the credit spread and the influence of monetary policy shocks on its dynamics in Korea. Using the innovations accounting technique from an estimated vector autoregression (VAR) model, we provide a set of interesting results on the short run and the medium run determinants of the credit spread and its dynamics. The key findings are that (i) the default risk premium is the major driving force of the credit spread dynamics for low grade bonds, and (ii) monetary policy is a significant driving force of the medium term dynamics of the credit spread.

Suggested Citation

  • Inwon Jang & David Kim, 2009. "The Dynamics of the Credit Spread and Monetary Policy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 109-131, May.
    • Handle: RePEc:sae:emffin:v:8:y:2009:i:2:p:109-131
    DOI: 10.1177/097265270900800202
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Credit spread; default risk premium; liquidity risk premium; monetary policy; vector autoregression; Korea; JEL Classification: E32; JEL Classification: E44; JEL Classification: E52; JEL Classification: G12;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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