The Impact of Monetary Policy on Corporate Bonds under Regime Shifts

Massimo Guidolin, Alexei G. Orlov and Manuela Pedio ()

No 562, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We study the effects of a conventional monetary expansion, quantitative easing, and of the maturity extension program on corporate bond yields using impulse response functions to shocks obtained from flexible models with regimes. We construct weekly bond portfolios sorting individual bond trades by rating and maturity from TRACE. A standard single-state VAR model is inadequate to capture the dynamics of the data. On the contrary, under a three-state Markov switching model with time-homogeneous VAR coefficients, we find that unconventional policies may have been generally expected to decrease corporate yields. However, even though the sign of the responses is the one expected by policy-makers, the size of the estimated effects depends on the assumptions regarding the decline in long-term Treasury yields caused by unconventional policies, on which considerable uncertainty remains. Keywords: Unconventional monetary policy, corporate bonds, term structure of Treasury yields, impulse response function, Markov swit ching vector autoregression. JEL codes: G12, E43, C32.

Date: 2015
New Economics Papers: this item is included in nep-mac and nep-mon
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Journal Article: The impact of monetary policy on corporate bonds under regime shifts (2017)
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