Do Credit Markets Respond to Macroeconomic Shocks? The Case for Reverse Causality
84 Pages Posted: 8 Oct 2020 Last revised: 26 Mar 2021
Date Written: March 26, 2021
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: Suggested Citation