IDEAS home Printed from https://ideas.repec.org/p/boi/wpaper/2015.07.html
   My bibliography  Save this paper

Banks Strategies and Credit Spreads as Leading Indicators for the Real Business Cycles Fluctuations

Author

Listed:
  • Emanuel Barnea

    (Bank of Israel)

  • Yigal Menashe

    (Bank of Israel)

Abstract

Following Gilchrist and Zakrajsek (2012), we decompose bond credit spreads into a component that reflects the probability of default of the corporate firm and a residual referred to as "excess bond premium" (henceforth EBP). The latter appears to be a leading indicator of real business cycles. Our main contribution is in providing empirical support to the hypothesis that the EBP in part reflect the influence of the commercial banks’ strategies on corporate bond pricing. This influence emanates from the superiority of information on firms' debt repayment and settlement banks have and capital market lenders do not. This superiority comes about from the relatively high monitoring costs and the constrained restructuring ability capital market lenders face. These findings are consistent with the notion that a rise in EBP reflects a measure taken by banks that could lead to further downturns in the economy.

Suggested Citation

  • Emanuel Barnea & Yigal Menashe, 2015. "Banks Strategies and Credit Spreads as Leading Indicators for the Real Business Cycles Fluctuations," Bank of Israel Working Papers 2015.07, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2015.07
    as

    Download full text from publisher

    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2015.07.pdf
    File Function: First version, 2015
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carabarín Aguirre Mauricio & Peláez Gómez Carlos D., 2021. "Financial Frictions in Mexico: Evidence from the Credit Spread and its Components," Working Papers 2021-20, Banco de México.

    More about this item

    Keywords

    Bond credit spreads; Distance to default; Excess bond premium; Banking loan loss reserves; Banking capital ratio; Banking coverage ratio; Business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boi:wpaper:2015.07. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Yossi Yakhin (email available below). General contact details of provider: https://edirc.repec.org/data/boigvil.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.