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

110 Pages Posted: 8 Oct 2020 Last revised: 2 Oct 2022

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: September 30, 2022

Abstract

The response of corporate bond credit spreads to three exogenous macro-shocks -- oil supply, investment-specific technology, and government spending -- is large, significant, and a mirror image of macroeconomic activity. This counter-cyclicality is largely driven by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro-shocks to credit markets is scarce and recent work highlights the real effects of credit 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 (September 30, 2022). Journal of Finance, Forthcoming, 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 Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
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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