Corporate Bond Risk and Real Activity: An Empirical Analysis of Yield Spreads and Their Systematic Components

Iryna Ivaschenko and Jorge Chan-Lau

No 2001/158, IMF Working Papers from International Monetary Fund

Abstract: This paper finds that the yield spread of investment-grade bonds relative to Treasuries, a proxy of default risk, predicts marginal changes in industrial production in the United States up to 12 months in the future, even upon controlling for a commonly used predictor such as the commercial paper spread. The paper also finds that systematic risk factors associated with the yield spread of investment-grade bonds to a variety of risk-free benchmarks - Treasuries, agency bonds, and AAA-rated bonds - have significant predictive content for future growth rate of industrial production at 3 to 18 months forecasting horizon, both in- and out-of-sample. Finally, a regime-switching estimation shows that the systematic risk component is also able to capture "industrial production business cycle" well.

Keywords: WP; AAA-rated bond; commercial paper; growth rate; maturity bond index; Investment grade bonds; corporate spreads; business cycle; forecasting; GMM estimation; systematic risk; principal components analysis; regime-switching; Markov process; United States; numbers in parenthesis; coefficients estimate; number of lag; Industrial production; Bonds; Corporate bonds; Yield curve; Securities (search for similar items in EconPapers)
Pages: 62
Date: 2001-10-01
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Citations: View citations in EconPapers (8)

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