Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2019:7: The Relation between the Corporate Bond-Yield Spread and the Real Economy: Stable or TimeVarying?

Sune Karlsson () and Pär Österholm ()
Additional contact information
Sune Karlsson: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Pär Österholm: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden

Abstract: In this paper we assess whether the relation between the corporate bond-yield spread and the real economy has been stable over time. Using quarterly US data from 1953Q1 to 2018Q2, we estimate Bayesian VAR models which allow for drifting parameters and/or stochastic volatility and conduct formal model selection in a Bayesian setting. Our results indicate that the relation between the variables has been stable; we do, however, find strong support for stochastic volatility. We conclude that the corporate bond-yield spread’s usefulness for predicting real economic activity has not changed to a relevant extent after the Great Reces-sion.

Keywords: Bayesian VAR; Time-varying parameters; Stochastic volatility; Model selection

JEL-codes: C11; C32; C52; E44; E47; G17

9 pages, September 25, 2019

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