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Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality

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  • MARTIJN BOONS
  • GIORGIO OTTONELLO
  • ROSSEN VALKANOV

Abstract

The response of corporate bond credit spreads to three exogenous macro shocks—oil supply, investment‐specific technology, and government spending—is large, significant, and a mirror image of macroeconomic activity. This countercyclicality is driven largely by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy.

Suggested Citation

  • Martijn Boons & Giorgio Ottonello & Rossen Valkanov, 2023. "Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality," Journal of Finance, American Finance Association, vol. 78(5), pages 2901-2943, October.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:5:p:2901-2943
    DOI: 10.1111/jofi.13261
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    Cited by:

    1. Kagerer, B., 2024. "Geopolitics and corporate risk: Evidence from EU-Russia conflict shocks," Cambridge Working Papers in Economics 2471, Faculty of Economics, University of Cambridge.
    2. Li, Jingxin & Lan, Qiujun & Wang, Xiangjin & Ge, Linnan, 2025. "Oil price shocks and green bond spreads: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 178-190.
    3. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).

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