The Dynamics of the Credit Spread and Monetary Policy

Inwon Jang and David Kim
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Inwon Jang: Inwon Jang is at the Deparment of Finance, Girard School of Business, Merrimack College, Boston, US.

Journal of Emerging Market Finance, 2009, vol. 8, issue 2, 109-131

Abstract: This paper empirically examines the aggregate determinants of the credit spread and the influence of monetary policy shocks on its dynamics in Korea. Using the innovations accounting technique from an estimated vector autoregression (VAR) model, we provide a set of interesting results on the short run and the medium run determinants of the credit spread and its dynamics. The key findings are that (i) the default risk premium is the major driving force of the credit spread dynamics for low grade bonds, and (ii) monetary policy is a significant driving force of the medium term dynamics of the credit spread.

Keywords: Credit spread; default risk premium; liquidity risk premium; monetary policy; vector autoregression; Korea; JEL Classification: E32; JEL Classification: E44; JEL Classification: E52; JEL Classification: G12 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:8:y:2009:i:2:p:109-131

DOI: 10.1177/097265270900800202

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