NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets

Simon Gilchrist, Vladimir Yankov, Egon Zakrajsek

NBER Working Paper No. 14863
Issued in April 2009
NBER Program(s):   ME

To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30 percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S. economic fluctuations during the 1990--2008 period.

download in pdf format
   (483 K)

email paper

This paper is available as PDF (483 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14863

Published: Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May. citation courtesy of

Users who downloaded this paper also downloaded these:
Gilchrist and Zakrajsek w17021 Credit Spreads and Business Cycle Fluctuations
Gertler and Lown w7549 The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications
Faust, Gilchrist, Wright, and Zakrajsek w16725 Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach
Bernanke, Gertler, and Gilchrist w6455 The Financial Accelerator in a Quantitative Business Cycle Framework
Gilchrist and Zakrajsek w13174 Investment and the Cost of Capital: New Evidence from the Corporate Bond Market
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us