Abstract
Empirical results for the United States show that the credit risk premium leads the stock market by up to four weeks. They are robust across different stock market measures, empirical methods and sample periods. The finding of a flight to quality that first occurs in the corporate bond and subsequently in the stock market suggests a pecking order in risk premia. It implies that stock market investors may benefit from closely monitoring the corporate bond market.
Acknowledgement
The usual disclaimer applies.
Notes
By taking the natural logarithm of both confidence indices they measure a yield differential like a corporate bond spread.
In addition, results for the corporate bond spread are generally similar to those for both confidence indices. The main exception is somewhat weaker findings for the excess stock market return in the long backward sample. This is most likely due to the fact that a corporate bond spread does not take into account the level of the yield, which seems to be important, given the level differences in the yields over the total sample period.
The impulse responses are based on a non-factorized one unit residual decomposition method. Cholesky decomposition methods, irrespective of the order, show similar results.