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The asymmetric effects of monetary policy shocks: Evidence from credit default swap markets

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  • Huang, Difang
  • Liang, Ying

Abstract

We document how financial constraints amplify monetary policy transmission through credit derivative markets. Using credit default swap (CDS) data, we show that when monetary policy tightens, financially constrained firms face an immediate spike in CDS spreads and a simultaneous collapse in trading volume, while unconstrained firms experience gradual spread adjustments with stable trading activity. Three channels drive this asymmetry: heightened funding costs, reduced dealer market-making, and amplified default risk. Our findings suggest that monetary policy actions may unintentionally amplify financial fragility through the interaction of credit risk and market liquidity.

Suggested Citation

  • Huang, Difang & Liang, Ying, 2026. "The asymmetric effects of monetary policy shocks: Evidence from credit default swap markets," Journal of Empirical Finance, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:empfin:v:88:y:2026:i:c:s0927539826000605
    DOI: 10.1016/j.jempfin.2026.101746
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    Keywords

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    JEL classification:

    • 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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