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The Impact of Monetary Policy on Corporate Bonds under Regime Shifts

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  • Massimo Guidolin
  • Alexei G. Orlov
  • Manuela Pedio

Abstract

We study the effects of a conventional monetary expansion, quantitative easing, and of the maturity extension program on corporate bond yields using impulse response functions to shocks obtained from flexible models with regimes. We construct weekly bond portfolios sorting individual bond trades by rating and maturity from TRACE. A standard single-state VAR model is inadequate to capture the dynamics of the data. On the contrary, under a three-state Markov switching model with time-homogeneous VAR coefficients, we find that unconventional policies may have been generally expected to decrease corporate yields. However, even though the sign of the responses is the one expected by policy-makers, the size of the estimated effects depends on the assumptions regarding the decline in long-term Treasury yields caused by unconventional policies, on which considerable uncertainty remains. Keywords: Unconventional monetary policy, corporate bonds, term structure of Treasury yields, impulse response function, Markov swit ching vector autoregression. JEL codes: G12, E43, C32.

Suggested Citation

  • Massimo Guidolin & Alexei G. Orlov & Manuela Pedio, 2015. "The Impact of Monetary Policy on Corporate Bonds under Regime Shifts," Working Papers 562, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:562
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    5. Lin, Saiyan & Chen, Rongda & Lv, Zhihong & Zhou, Tianqing & Jin, Chenglu, 2019. "Integrated measurement of liquidity risk and market risk of company bonds based on the optimal Copula model," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    unconventional monetary policy; corporate bonds; term structure of treasury yields; impulse response function; markov swit ching vector autoregression. jel codes: g12; e43; c32.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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