← Search

Journal of Finance Vol. 78 No. 5 2023

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

Martijn Boons1,2,3,4,5,6; Giorgio Ottonello1,2,3,4,5,6; Rossen Valkanov7,1,2,3,4,5,6

1 Tilburg University · 2 Peking University · 3 Aarhus University · 4 HSBC Holdings · 5 University of California San Diego · 6 Nova Institut · 7 Valve (United States)

open access

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 countercyclicality is driven largely 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.

DOI
10.1111/jofi.13261
Volume
78
Issue
5
Pages
2901-2943
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite