Creditmarketshocksandeconomicfluctuations:Evidencefrom corporatebondandstockmarkets

Toidentifydisruptionsincreditmarkets,researchontheroleofassetpricesineconomic fluctuationshasfocusedontheinformationcontentofvariouscorporatecreditspreads. Were-examinethisevidenceusingabroadarrayofcreditspreadsconstructeddirectly from thesecondarybondpricesonoutstandingseniorunsecureddebtissuedbyalarge panelofnonfinancialfirms.Anadvantageofour‘‘ground-up’’approachisthatweare able toconstructmatchedportfoliosofequityreturns,whichallowsustoexaminethe informationcontentofbondspreadsthatisorthogonaltotheinformationcontainedin stockpricesofthesamesetoffirms,aswellasinmacroeconomicvariablesmeasuring economicactivity,inflation,interestrates,andotherfinancialindicators.Ourportfolio- basedbondspreadscontainsubstantialpredictivepowerforeconomicactivityand outperform—especiallyatlongerhorizons—standarddefault-riskindicators.Muchof the predictivepowerofbondspreadsforeconomicactivityisembeddedinsecurities issued byintermediate-riskratherthanhigh-riskfirms.Accordingtoimpulseresponses from astructuralfactor-augmentedvectorautoregression,unexpectedincreasesinbond spreads causelargeandpersistentcontractionsineconomicactivity.Indeed,shocks emanatingfromthecorporatebondmarketaccountformorethan30percentofthe forecast errorvarianceineconomicactivityatthetwo-tofour-yearhorizon.Overall,our results implythatcreditmarketshockshavecontributedsignificantlytoUSeconomic fluctuationsduringthe1990–2008period