Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality

84 Pages Posted: 8 Oct 2020 Last revised: 26 Mar 2021

See all articles by Martijn Boons

Martijn Boons

Tilburg University

Giorgio Ottonello

Nova School of Business and Economics

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: March 26, 2021

Abstract

We identify the response of corporate bond credit spreads to three exogenous macroeconomic
shocks: oil supply, investment-specific technology, and government spending. The response
is large, significant, and close to a mirror image of the response of macroeconomic activity.
The counter-cyclicality of credit spreads is mostly driven by time-varying credit risk premia,
which translates into significant predictability in corporate bond returns. Standard proxies for
equity risk premia exhibit similar responses, providing external validity to this argument. As
causal evidence linking large, infrequent macro-shocks to credit risk premia is scarce and recent
work mostly focuses on the real effects of credit market fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy.

Keywords: Credit Spreads, Time-Varying Risk Premia, Macroeconomic Risk, Shocks, Return Predictability

JEL Classification: E44, G12

Suggested Citation

Boons, Martijn and Ottonello, Giorgio and Valkanov, Rossen, Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality (March 26, 2021). Available at SSRN: https://ssrn.com/abstract=3677936 or http://dx.doi.org/10.2139/ssrn.3677936

Martijn Boons

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Giorgio Ottonello (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

HOME PAGE: http://https://sites.google.com/view/gi8nello

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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