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Anatomy of Corporate Credit Spreads: The Great Recession vs. COVID-19

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  • Mahdi Ebsim
  • Miguel Faria-e-Castro
  • Julian Kozlowski

Abstract

We compare the evolution of corporate credit spreads during the Great Recession and the COVID-19 pandemic. The two crises featured increases of similar magnitudes in the median and cross-sectional dispersion of credit spreads, but the pandemic was short-lived and different sectors were affected. The micro-data reveal larger differences between the two episodes: the Great Recession featured an increase in the across-firm dispersion, and leverage was an important predictor of credit spreads. Differently, the COVID-19 crisis displayed a larger increase in within-firm dispersion, and funding liquidity was a more important predictor of movements in spreads. These findings suggest that, at the corporate level, the Great Recession was primarily a solvency crisis, while COVID-19 was a liquidity crisis.

Suggested Citation

  • Mahdi Ebsim & Miguel Faria-e-Castro & Julian Kozlowski, 2020. "Anatomy of Corporate Credit Spreads: The Great Recession vs. COVID-19," Working Papers 2020-035, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:88871
    DOI: 10.20955/wp.2020.035
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit Spreads; Great Recession; COVID-19;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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