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Corporate Bond Risk and Real Activity

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  • Iryna V. Ivaschenko
  • Jorge A. Chan-Lau

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/158.

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Length: 62
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/158

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  1. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  2. Garry J. Schinasi & T. Todd Smith & Charles Frederick Kramer, 2001. "Financial Implications of the Shrinking Supply of U.S. Treasury Securities," IMF Working Papers 01/61, International Monetary Fund.
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  4. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
  5. Bertocchi, Marida & Giacometti, Rosella & Zenios, Stavros A., 2005. "Risk factor analysis and portfolio immunization in the corporate bond market," European Journal of Operational Research, Elsevier, Elsevier, vol. 161(2), pages 348-363, March.
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  8. Michael J. Flemming, 2000. "Financial Market Implications of the Federal Debt Paydown," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 221-252.
  9. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1861-82, December.
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  11. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
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Cited by:
  1. Zhiwei Zhang, 2002. "Corporate Bond Spreads and the Business Cycle," Working Papers, Bank of Canada 02-15, Bank of Canada.
  2. Gabe de Bondt, 2005. "Does the credit risk premium lead the stock market?," Applied Financial Economics Letters, Taylor and Francis Journals, Taylor and Francis Journals, vol. 1(5), pages 263-268, September.
  3. Gabe de Bondt, 2004. "The balance sheet channel of monetary policy: first empirical evidence for the euro area corporate bond market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(3), pages 219-228.
  4. de Bondt, Gabe, 2002. "Euro area corporate debt securities market: first empirical evidence," Working Paper Series, European Central Bank 0164, European Central Bank.
  5. Iryna V. Ivaschenko, 2003. "How Much Leverage is too Much, or Does Corporate Risk Determine the Severity of a Recession?," IMF Working Papers 03/3, International Monetary Fund.
  6. Michael Bleaney & Paul Mizen & Veronica Veleanu, . "Bond Spreads as Predictors of Economic Activity in Eight European Economies," Discussion Papers 12/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  7. Buchmann, Marco, 2011. "Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession," Working Paper Series, European Central Bank 1286, European Central Bank.

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