Credit Spreads, Business Conditions, and Expected Corporate Bond Returns

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Article number20
Journal / PublicationJOURNAL OF RISK AND FINANCIAL MANAGEMENT
Volume13
Issue number2
Online published21 Jan 2020
Publication statusPublished - Feb 2020

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Abstract

Using an aggregate credit spread index, we find that it has substantial predictive power for corporate bond returns over short and long horizons. The return predictability is economically and statistically significant and robust to various controls. The credit spread index and its components have more predictive power for bond returns than conventional default and term spreads. When decomposing the credit spread index into investment- and speculative-grade components, the latter has more predictive power for future bond returns. The source of the index's predictive power is from its ability to forecast future economic conditions.

Research Area(s)

  • credit spreads, default risk, corporate bonds, return predictability, economic conditions, STOCK RETURNS, RISK-FACTORS, SAMPLE, PREDICTIONS, MARKET, YIELDS, TESTS, CYCLE

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