Monetary Policy and Corporate Bond Returns

Alexandros Kontonikas, Paulo Maio and Zivile Zekaite

Working Papers from Business School - Economics, University of Glasgow

Abstract: We investigate the impact of monetary policy shocks, measured as the surprise change in the Fed Funds rate (FFR), on the excess returns of U.S. corporate bonds. We obtain a significant negative response of excess bond returns to shocks in FFR, and this effect is especially strong in the period before the 2007-09 financial crisis and for bonds with longer maturity and lower rating. By using a VAR-based decomposition for excess bond returns, our results show that the largest part of the contemporaneous negative response of corporate bond returns to monetary policy tightening can be attributed to higher expected excess bond returns (higher bond risk premia). Therefore, the discount rate channel represents an important mechanism through which monetary policy affect corporate bonds. Our results also show that the importance of this effect has declined after the financial crisis

Keywords: Corporate Bond Market; Variance Decomposition; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G10 G12 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Monetary Policy and Corporate Bond Returns (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2016_05

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