Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components
63 Pages Posted: 1 Feb 2006
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
New Indexes of Coincident and Leading Economic Indicators
By James H. Stock and Mark W. Watson
-
Forecasting Output and Inflation: The Role of Asset Prices
By James H. Stock and Mark W. Watson
-
Predicting U.S. Recessions: Financial Variables as Leading Indicators
-
A Multi-Country Comparison of Term Structure Forecasts at Long Horizons
-
On the Predictive Power of Interest Rates and Interest Rate Spreads
-
Why Does the Paper-Bill Spread Predict Real Economic Activity?
-
A Re-Examination of the Predictability of Economic Activity Using the Yield Spread
By James D. Hamilton and Dong Heon Kim
-
A Re-Examination of the Predictability of Economic Activity Using the Yield Spread
By James D. Hamilton and Dong Heon Kim
-
The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications
By Mark Gertler and Cara S. Lown
-
The Predictive Content of the Interest Rate Term Spread for Future Economic Growth