Financial Cycles, Credit Spreads and Real Business Cycles

תקציר

The paper follows Gilchrist and Zakrajsek (2012) (henceforth GZ) in examining the evidence on the relationship between the bond market credit spreads (pricing), and financial intermediation as is reflected in banking conducts and the real business cycles. We use an extensive data set of prices and debts of outstanding corporate bonds trading in the Israeli capital market as well as of government bonds with which we construct for every corporate firm and at each date a credit spread index as in GZ. Similarly to GZ we decompose each of these spread indices into a predicted component that captures the available firm-specific information on expected defaults and a residual that is termed excessive bond premium EBP. Our work aimed at identifying the causes of the dynamics of the EBP. As it turns out both the weighted average of these indices and that of the EBP are found to be a powerful predictor of economic activity (a leading indicator). Similar to GZ our results indicate that the predictive content of credit spreads is due primarily to movements in the EBP. Here we extend GZ research by focusing on the effects of the banking sector conducts and performances on the capital market and its (derived) EBP. We find a significant and robust relationships within which, the banking conducts affect the EBP. Among other banking indicators, we find evidence to the fact that the banks' reassessments of their group of borrowers' exposure to risk causes an increase in the EBP. Also the share of the corporate firm's debt to banks (out of its total debt) is found to negatively affect the EBP. These findings and others support the notion that a rise in the EBP may reflect an adverse banking risk management that further propagates downturn in the macroeconomy business cycles.