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The Impact of the Federal Reserve's Large-Scale Asset Purchase Programs on Corporate Credit Risk

  • Simon Gilchrist
  • Egon Zakrajsek

Estimating the effect of Federal Reserve's announcements of Large-Scale Asset Purchase (LSAP) programs on corporate credit risk is complicated by the simultaneity of policy decisions and movements in prices of risky financial assets, as well as by the fact that both interest rates of assets targeted by the programs and indicators of credit risk reacted to other common shocks during the recent financial crisis. This paper employs a heteroskedasticity-based approach to estimate the structural coefficient measuring the sensitivity of market-based indicators of corporate credit risk to declines in the benchmark market interest rates prompted by the LSAP announcements. The results indicate that the LSAP announcements led to a significant reduction in the cost of insuring against default risk--as measured by the CDX indexes--for both investment- and speculative-grade corporate credits. While the unconventional policy measures employed by the Federal Reserve to stimulate the economy have substantially lowered the overall level of credit risk in the economy, the LSAP announcements appear to have had no measurable effect on credit risk in the financial intermediary sector.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19337.

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Date of creation: Aug 2013
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Publication status: published as Simon Gilchrist & Egon ZakrajÅ¡ek, 2013. "The Impact of the Federal Reserve's LargeâScale Asset Purchase Programs on Corporate Credit Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 29-57, December.
Handle: RePEc:nbr:nberwo:19337
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