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Credit spreads, economic activity and fragmentation

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  • De Santis, Roberto A.

Abstract

Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fl?uctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-fi?nancial industries, we estimate a market-wide relative excess bond premium - a function of the unobserved systematic component -, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term re?financing operations in December 2011, predicting the ?financial crisis and the two recessions. Finally, using the countries?excess bond premia, we fi?nd that fragmentation risk increased sharply after Lehman?s bankruptcy and during the sovereign debt crisis. JEL Classification: C32, F36, G12, G15

Suggested Citation

  • De Santis, Roberto A., 2016. "Credit spreads, economic activity and fragmentation," Working Paper Series 1930, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20161930
    Note: 185689
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    References listed on IDEAS

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    Cited by:

    1. Zaghini, Andrea, 2019. "The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 282-297.
    2. Satoshi Tezuka & Yoichi Matsubayashi, 2018. "Credit Spread, Financial Market and Real Activities under Financial Instability: Empirical Evidence with MS-SBVAR," Discussion Papers 1812, Graduate School of Economics, Kobe University.

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    More about this item

    Keywords

    corporate credit spreads; forecasts; fragmentation; sentiment;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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