The term structure of credit spreads and business cycle in Japan

Okimoto, Tatsuyoshi; Takaoka, Sumiko

doi:10.1016/j.jjie.2017.06.001

Cited by 13 publications

(15 citation statements)

References 25 publications

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“…The main objectives of this study are to examine whether the information contained in credit spread curve distributions can improve forecasts of economic growth rates in Japan and to identify the deciles of the empirical distribution of credit spread curves that have more predictive power for business cycles in Japan. To this end, we consider the BM and PR models, following Ang et al (2006), Zakrajšek (2012), andTakaoka (2017). In addition, we extend the PR model by incorporating a smooth-transition model to check whether credit spread uncertainty affects the predictive relationship between credit spread curves and the business cycle in Japan.…”

Section: Methodsmentioning

confidence: 99%

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The credit spread curve distribution and economic fluctuations in Japan

Okimoto

Takaoka

2022

Journal of International Money and Finance

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Predicting the future economy is of great interest for practitioners and policymakers. This study challenges this problem by examining the relation between credit spread curves and future economic activity. To this end, we construct a monthly empirical distribution of credit spread curves by calculating credit spreads of corporate bonds at the firm level in Japan and examine whether it can be used to predict a Japanese business cycle. We find that the credit spread curve information in higher deciles (implying lower credit quality) provides more predictive power for the future economy than the information of government bond yield curve or the credit spread index suggested by the previous studies. Also, the smooth-transition predictive regression analysis demonstrates that the credit spread curves have more predictive power under the low uncertainty regime, and show a significant predictive power for a short horizon for both regimes. Finally, our component-wise analysis shows that the credit spread curve information has robust predictive power for producer-side indicators under the low uncertainty regime and for labor market conditions regardless of the regime.

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Section: Methodsmentioning

confidence: 99%

“…Third, it also contributes to the literature on credit quality measure of the firm. The credit rating is the most common measure of credit quality as Wu and Zhang (2008) and Okimoto and Takaoka (2017) use credit spread for each credit rating class, though it has some problems, see e.g. Hilscher and Wilson (2017).…”

Section: Introductionmentioning

confidence: 99%

The credit spread curve distribution and economic fluctuations in Japan

Okimoto

Takaoka

2022

Journal of International Money and Finance

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“…These findings are in line with those of previous studies on the relationship between credit spread and the predictive ability for macroeconomic activity. For example, Okimoto and Takaoka (2017) suggest that the credit curve of medium-grade corporate bonds has useful information for predicting the business cycle in Japan. The results highlight the usefulness of the term structure of credit spreads in predicting economic fluctuation.…”

Section: Out-of-sample Predictive Power Of Credit Spreadsmentioning

confidence: 99%

“…However, the existing Japanese credit index is difficult to analyze because the yield for the rating class to which corporate bonds with huge outstanding amounts belong is significantly biased. Okimoto and Takaoka (2017) combine data drawn from the Japan Securities Dealers Association (hereafter JSDA) with Thomson Reuters Bond Credit Curve to create the credit curve index. Kobayashi (2017) focuses on Japanese credit spreads at the firm level and shows the goodness of fit of the study model by aggregating firm-based spreads.…”

Section: Introductionmentioning

confidence: 99%

Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

Kobayashi

2021

IJFS

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This study extracts the common factors from firm-based credit spreads of major Japanese corporate bonds and examines the predictive content of the credit spread on the real economy. Instead of employing single-maturity corporate bond spreads, we focus on the entire term structure of the credit spread to predict the business cycle. We extend the dynamic Nelson-Siegel model to allow for both common and firm-specific factors. The results show that the estimated common factors are important drivers of individual credit spreads and have substantial predictive power for future Japanese economic activity. This study contributes to the literature by examining the relationship between firm-based credit spread curves and economic fluctuation and forecasting the business cycle.

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“…After the 2008 international financial crisis, many scholars shifted their research focus to the relationship between macroeconomics and credit spreads. Through calculations, Longstaff and Schwarts [4] found that bond credit spreads are negatively correlated with government bond yields.Tatsuyoshi Okimoto [5] studied the effectiveness of the term structure of credit spreads under the Japanese business cycle in 2017, and the results proved that the increase in credit spreads is related to future economic expansion. It can be seen that the analysis of credit spreads is inseparable from the trend of the economic situation.…”

Section: Literature Reviewmentioning

confidence: 99%

Research on the Relationship Between Corporate Bond Credit Spreads and Macroeconomic Factors Based on TVP-VAR Model

Cao¹,

Wang²

2021

dtem

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There is a significant linkage relationship between corporate bond credit spreads and macroeconomic indicators. Exploring the dynamic and time-varying relationship between the two can better control and adjust market risks at the macro level. Selecting the 2010-2019 quarterly data, and establishing the TVP-VAR model of macro indicators and credit spreads, the following conclusions are drawn: (1) Credit spreads are counter-cyclical. (2) The degree of response of credit spreads and macroeconomic indicators in years with large economic fluctuations is significantly higher than in years when the economy is stable, and tends to be stable for a long time. (3) PMI and risk-free interest rates have a significant negative impact on credit spreads in the long term, and CPI has a relatively low contribution rate to the fluctuation of credit spreads. Based on this, targeted recommendations such as the implementation of prudent macroeconomic policies are provided to provide a basis for corporate bond pricing, regulators to control market risks, and to formulate relevant development strategies, and to promote the healthy development of the corporate bond market.

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The term structure of credit spreads and business cycle in Japan

Cited by 13 publications

References 25 publications

The credit spread curve distribution and economic fluctuations in Japan

The credit spread curve distribution and economic fluctuations in Japan

Common Factors in the Term Structure of Credit Spreads and Predicting the Macroeconomy in Japan

Research on the Relationship Between Corporate Bond Credit Spreads and Macroeconomic Factors Based on TVP-VAR Model

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