Leading Behavior of Interest Rate Term Spreads and Credit Risk Spreads in Korea

Won-Gi Kim () and Noh-Sun Kwark
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Won-Gi Kim: Department of Economics, Texas A&M University

No 1203, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: Interest rate term spreads and credit spreads have been well known to have a predictive power for future fluctuations of output in many developed countries. This study examines leading behaviors of interest rate term spreads and credit risk spreads in Korea in two ways. First, we apply various empirical methods for finding leading behavior of interest rate term spreads and credit risk spreads in business fluctuations over the period spanning from May 1995 to January 2012. Second, using structural VAR models, we decompose the sources of fluctuations of output and interest rate spreads into two sorts, permanent real shocks and temporary financial shocks and examine the impulse response of each variable to the shocks focusing on the leading behavior of the spreads over the business cycle. We establish successfully the leading behavior of the term spread and the credit risk spread in Korea that the term spread tends to increase and the credit risk spread tends to shrink about 4 to 6 months before an expansion. We also find that much of the output fluctuations are attributed to real shocks while fluctuations in the interest rate spreads come from temporary financial shocks.

Keywords: Term spread; Credit risk spreads; Forecast-error variance decompo- sition (search for similar items in EconPapers)
JEL-codes: E32 F3 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-03
New Economics Papers: this item is included in nep-ban and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:1203

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