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Monetary Policy and Corporate Bond Returns

Listed author(s):
  • Alexandros Kontonikas
  • Paulo Maio
  • Zivile Zekaite

We investigate the impact of monetary policy shocks, measured as the surprise change in the Fed Funds rate (FFR), on the excess returns of U.S. corporate bonds. We obtain a significant negative response of excess bond returns to shocks in FFR, and this effect is especially strong in the period before the 2007-09 financial crisis and for bonds with longer maturity and lower rating. By using a VAR-based decomposition for excess bond returns, our results show that the largest part of the contemporaneous negative response of corporate bond returns to monetary policy tightening can be attributed to higher expected excess bond returns (higher bond risk premia). Therefore, the discount rate channel represents an important mechanism through which monetary policy affect corporate bonds. Our results also show that the importance of this e ect has declined after the financial crisis

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2016_05.

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Date of creation: Jan 2016
Handle: RePEc:gla:glaewp:2016_05
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