Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components

63 Pages Posted: 1 Feb 2006

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO); National University of Singapore (NUS) - Risk Management Institute

Iryna V. Ivaschenko

International Monetary Fund (IMF) - Research Department

Date Written: October 2001

Abstract

This paper finds that the yield spread of investment-grade bonds relative to Treasuries, a proxy of default risk, predicts marginal changes in industrial production in the United States up to 12 months in the future, even upon controlling for a commonly used predictor such as the commercial paper spread. The paper also finds that systematic risk factors associated with the yield spread of investment-grade bonds to a variety of risk-free benchmarks - Treasuries, agency bonds, and AAA-rated bonds - have significant predictive content for future growth rate of industrial production at 3 to 18 months forecasting horizon, both in- and out-of-sample. Finally, a regime-switching estimation shows that the systematic risk component is also able to capture industrial production business cycle well.

Keywords: Investment grade bonds, corporate spreads, business cycle, forecasting, GMM estimation, systematic risk, principal components analysis, regime-switching, Markov process, United States

JEL Classification: E32, E37, E43, E44

Suggested Citation

Chan-Lau, Jorge Antonio and Ivaschenko, Iryna, Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components (October 2001). IMF Working Paper No. 01/158, Available at SSRN: https://ssrn.com/abstract=879986

Jorge Antonio Chan-Lau (Contact Author)

ASEAN+3 Macroeconomic Research (AMRO) ( email )

10 Shenton Way #11-07/08
MAS Building
Singapore, 079117
Singapore

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Iryna Ivaschenko

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4271 (Phone)

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