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Credit Spreads, Daily Business Cycle, and Corporate Bond Returns Predictability

Alexey Ivashchenko
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Alexey Ivashchenko: University of Lausanne and Swiss Finance Institute

No 17-67, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The part of credit spread that is not explained by corporate credit risk forecasts future economic activity. I show that the link with aggregate business risk and bond liquidity risk explains this fi nding. Once I project spreads on these two risk factors, which are readily measurable with the daily frequency, in addition to corporate credit risk, the forecasting power of the residual spread reduces substantially for some macro variables and disappears entirely for the others. Such residual, however, turns out to be an out-of-sample forecast of corporate bond market returns. An investment strategy based on such forecasts delivers risk-adjusted returns 50% higher than the corporate bond market.

Keywords: credit spreads; corporate bond returns; business cycle; predictability of returns (search for similar items in EconPapers)
JEL-codes: E44 G12 G17 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2017-04, Revised 2018-01
New Economics Papers: this item is included in nep-for and nep-mac
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