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Monetary Policy and Corporate Bond Returns

Author

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  • Kontonikas, A
  • Maio, P
  • Zekaite, Z

Abstract

We investigate the impact of monetary policy shocks (the surprise change in the Fed Funds rate (FFR)) on excess corporate bonds returns. We obtain a significant negative response of bond returns to FFR shocks. This effect is especially strong in the period before the 2007- 09 financial crisis and for bonds with longer maturity and lower rating. We show that the largest portion of this response is related to higher expected excess bond returns, especially term premia news. Therefore, the discount-rate channel represents an important mechanism through which monetary policy affects corporate bonds. However, the financial crisis has attenuated this effect.

Suggested Citation

  • Kontonikas, A & Maio, P & Zekaite, Z, 2017. "Monetary Policy and Corporate Bond Returns," Essex Finance Centre Working Papers 20571, University of Essex, Essex Business School.
    • Handle: RePEc:esy:uefcwp:20571
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    Cited by:

    1. Borisenko, Dmitry & Pozdeev, Igor, 2017. "Monetary Policy and Currency Returns: the Foresight Saga," Working Papers on Finance 1708, University of St. Gallen, School of Finance, revised 1710.
    2. Massimo Guidolin & Valentina Massagli & Manuela Pedio, 2021. "Does the cost of private debt respond to monetary policy? Heteroskedasticity-based identification in a model with regimes," The European Journal of Finance, Taylor & Francis Journals, vol. 27(18), pages 1804-1833, December.

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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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