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 20 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 1990-2007 period.JEL Classification: E32, E44, G12

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.

To attract retail time deposits, over 7,000 FDIC insured U.S. commercial banks publicly post their yield offers. I document an economically sizable and highly procyclical cross-sectional dispersion in these yield offers during the period 1997-2011. Banks adjusted their yields rigidly and asymmetrically with median duration of 7 weeks in response to increasing or constant Fed Funds rate target regimes and 3 weeks during regimes of decreasing Fed Fund rate target. I investigate to what extent information (search) costs on the part of the investors in this market can explain the observed pricing behavior. I build and estimate an asset pricing model with heterogeneous search cost investors. A large fraction of high information cost uninformed investors and the exit of low information cost informed investors rationalizes the observed price dispersion. I further qualitatively match the asymmetric yield rigidity within the framework of costly consumer search without the need to impose menu costs or other restrictions on the banks' repricing behavior.

This note examines the changes in the liquidity management at banks and nonbank financial firms in the United States that occurred following the proposal of the liquidity coverage ratio (LCR) requirement in 2010 and its finalization in 2014.