Credit spreads, economic activity and fragmentation

Arbeitspapier

Credit spreads may be jointly driven by developments that are orthogonal to the current state of the economy. We show that this unobserved systematic component is demanded to hedge against adverse economic fl?uctuations. Using either yield-to-maturity spreads or asset swap spreads for 2345 Eurobonds across euro area non-fi?nancial industries, we estimate a market-wide relative excess bond premium - a function of the unobserved systematic component -, which can predict real economic activity, the stock market and survey-based economic sentiment. This premium was highly negative between March 2003 and June 2007 in all bond segments and turned positive since then up to the launch of the 3-years long term refinancing operations in December 2011, predicting the financial crisis and the two recessions. Finally, using the countries?excess bond premia, we fi?nd that fragmentation risk increased sharply after Lehman?s bankruptcy and during the sovereign debt crisis.

Object Details

• ISBN: 978-92-899-2178-7
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1930

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Financial Aspects of Economic Integration ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets
• Subject: corporate credit spreads ; forecasts ; fragmentation ; sentiment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): De Santis, Roberto
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2016

Further information

• DOI: doi:10.2866/916346
• Handle: http://hdl.handle.net/10419/154363
• Last update: 10.03.2025, 11:46 AM CET