We would like to thank Larry Wall, Michel Normandin, Simon van Norden, Georges Dionne, Pascal Francois, Martin Boyer, Lars Stentoft, Iwan Meier, Mark Vaughan, and seminar participants at HEC Montreal, CIRPEE, and FMA.
THE EFFECT OF MONETARY POLICY ON CREDIT SPREADS
Article first published online: 13 DEC 2012
© 2012 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 35, Issue 4, pages 581–613, Winter 2012
How to Cite
Cenesizoglu, T. and Essid, B. (2012), THE EFFECT OF MONETARY POLICY ON CREDIT SPREADS. Journal of Financial Research, 35: 581–613. doi: 10.1111/j.1475-6803.2012.01329.x
- Issue published online: 13 DEC 2012
- Article first published online: 13 DEC 2012
We analyze the effect of monetary policy on yield spreads between corporate bonds with different credit ratings over the business cycle. We use futures contracts to distinguish between expected and unexpected changes in the Fed funds target rate and several indicators to distinguish between different phases of the business cycle. In line with the predictions of imperfect capital market theories, we find that yields on corporate bonds with low credit ratings widen (narrow) with respect to those with high credit ratings following an unexpected increase (decrease) in the Fed funds target rate during recession periods. Several tests suggest that our results are robust to outliers, potential endogeneity problems, empirical specification, control variables, countercyclical risk premium in futures, and alternative definitions of credit spreads and economic conditions.