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

32 Pages Posted: 4 Nov 2013

See all articles by Simon Gilchrist

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2013

Abstract

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.

Keywords: credit default swap (CDS), default risk channel, LSAPs, quantitative easing, identification through heteroskedasticity

JEL Classification: E44, E58, G2

Suggested Citation

Gilchrist, Simon and Zakrajsek, Egon, The Impact of the Federal Reserve's Large-Scale Asset Purchase Programs on Corporate Credit Risk (August 5, 2013). FEDS Working Paper No. 2013-56. Available at SSRN: https://ssrn.com/abstract=2348164 or http://dx.doi.org/10.2139/ssrn.2348164

Simon Gilchrist

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Egon Zakrajsek (Contact Author)

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-728-5864 (Phone)
202-452-3819 (Fax)

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