Monetary Policy Surprises and Corporate Credit Spreads

65 Pages Posted: 16 Nov 2020 Last revised: 15 Mar 2021

See all articles by Difang Huang

Difang Huang

Monash University

Xinjie Wang

Southern University of Science and Technology

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: September 27, 2020

Abstract

We study the effects of monetary policy surprises (MPSs) on corporate credit default swap (CDS) spreads. Using high-frequency surprises around Federal Open Market Committee (FOMC) announcements, we find a negative relation between changes in unexpected expansionary monetary policy and changes in CDS spreads using both panel regressions and time-series regressions. More importantly, we show that there is a strong cross-sectional effect of MPSs on CDS spreads. Unexpected expansionary monetary policy reduces the flight-to-safety and flight-to-liquidity phenomenon: The credit spread between investment-grade and high-yield CDSs narrows significantly following an unexpected monetary policy. Finally, we show that monetary policy affects CDS spreads through cash flow, financial constraints, and risk channels.

Keywords: monetary policy, credit risk, FOMC, single-name CDS

JEL Classification: G12, G14

Suggested Citation

Huang, Difang and Wang, Xinjie and Zhong, Zhaodong, Monetary Policy Surprises and Corporate Credit Spreads (September 27, 2020). Available at SSRN: https://ssrn.com/abstract=3700257 or http://dx.doi.org/10.2139/ssrn.3700257

Difang Huang

Monash University ( email )

900 Dandenong Road
Melbourne, Victoria 3145
Australia

HOME PAGE: http://difang-huang.github.io

Xinjie Wang (Contact Author)

Southern University of Science and Technology ( email )

1088 Xueyuan Blvd
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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