The aggregate credit spread and the business cycle

Factors affecting the yields of emerging market issuers: Evidence from the Asia-Pacific region

“…Collin-Dufresene et al (2002) expand upon the simple two-factor regression model proposed by Longstaff and Schwartz (1995) and include a wider set of independent variables to accommodate macroeconomic factors which are known to influence credit spreads (see Afonso and Strauch, 2004). Guha and Hiris (2002) show that a credit spread is a leading indicator of macroeconomic business conditions, with turning points in the credit spread anticipating changes in the business cycle, while Joutz and Maxwell (2002) note that non-investment grade bonds are more susceptible to external shocks (such as the Russian and Asian financial crises) than higher rated bonds. Expanding upon the regression techniques employed to study the credit spread phenomena, Manzoni (2002) and Batten and Hogan (2003), investigating the sterling eurobond market and the Australian eurobond market, respectively apply Generalized Autoregressive Conditional Heteroskedastic (GARCH) models to capture the persistence evident in the conditional variance of credit spreads.…”

A yield spread perspective on the great financial crisis: Break-point test evidence

“…This is a first important finding: even in the midst of the Great 2007-2008 Financial Crisis, FI markets never unravelled to the point of implying non-stationary yield spread dynamics, which would imply an infinite half-life of a shock, i.e., that whatever shock would never be re-absorbed. 19 The first panel of Table 3 shows full-sample results. 20 is negative for all seven spreads and only in one case (for the 5-year CMBS spread, which is in some sense consistent with Table 2)  0 fails to be statistically significant (but the p-value is 0.06).…”

“…First, to filter a financial crisis through the lenses of spread data is implicitly a way to relate financial events to business cycle developments. A feature of U.S. post-WWII business cycle experience that has been widely documented (see e.g., Friedman and Kuttner, 1993;Guha and Hiris, 2002;Gilchrist, Yankov and Zakrajsek, 2009) is the tendency of a number of yield spreads (e.g., between the interest rate on commercial paper and Treasury bills) to widen shortly before the onset of recessions and to narrow again before recoveries. One interpretation of these results is that these credit risk spread measure the default risk on private (relatively risky) debt.…”

High-Frequency Credit Spread Information and Macroeconomic Forecast Revision

“…of industrial production growth during the Great Depression. Guha and Hiris (2002) show that the same spread contains useful information about the turning points of business cycles. The spread between commercial paper and Treasury bills (paper-bill spread) has also shown to be a significant predictor of real growth (see, for example, Stock and Watson 1989;Friedman and Kuttner 1993;Emery 1996;Ewing et al 2003;Bordo and Haubrich 2004), and Gertler and Lown (1999) We assume that forecasters decide the current economic state using all the available real-time information summarised in the ADS index.…”