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Monetary Policy and Corporate Bond Returns

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  • Alexandros Kontonikas
  • Paulo Maio
  • Zivile Zekaite

Abstract

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 effect has declined after the financial crisis

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  • Alexandros Kontonikas & Paulo Maio & Zivile Zekaite, 2016. "Monetary Policy and Corporate Bond Returns," Working Papers 2016_05, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2016_05
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    2. 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.

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    More about this item

    Keywords

    Corporate Bond Market; Variance Decomposition; Monetary Policy;
    All these keywords.

    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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