Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

Takeshi Kobayashi
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Takeshi Kobayashi: Graduate School of Management, Nagoya University of Commerce and Business, 1-3-1 Nishiki Naka-ku, Nagoya 460-0003, Japan

IJFS, 2021, vol. 9, issue 2, 1-12

Abstract: This study extracts the common factors from firm-based credit spreads of major Japanese corporate bonds and examines the predictive content of the credit spread on the real economy. Instead of employing single-maturity corporate bond spreads, we focus on the entire term structure of the credit spread to predict the business cycle. We extend the dynamic Nelson-Siegel model to allow for both common and firm-specific factors. The results show that the estimated common factors are important drivers of individual credit spreads and have substantial predictive power for future Japanese economic activity. This study contributes to the literature by examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.

Keywords: credit spread; common factor; macroeconomic forecast (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2021
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