Credit risk and the transmission of interest rate shocks
Berardino Palazzo and
Ram Yamarthy
Journal of Monetary Economics, 2022, vol. 130, issue C, 120-136
Abstract:
Using daily credit default swap (CDS) data, we find a positive relation between corporate credit risk and unexpected monetary policy shocks during FOMC announcement days. Positive shocks to interest rates increase the expected loss component of CDS spreads as well as a risk premium component. However, not all firms respond in the same manner. We show that firm-level credit risk is an important driver of the monetary policy response, both in credit and equity markets, and its role is not diminished by the inclusion of other risk proxies. A stylized corporate model of monetary policy, investment, and financing rationalizes our findings.
Keywords: Credit risk; CDS; Monetary policy; Shock transmission; Equity returns (search for similar items in EconPapers)
JEL-codes: E52 G12 G18 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)
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Working Paper: Credit Risk and the Transmission of Interest Rate Shocks (2020) ![Downloads](/downloads_econpapers.gif)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:130:y:2022:i:c:p:120-136
DOI: 10.1016/j.jmoneco.2022.06.004
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