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Understanding the Excess Bond Premium

Author

Listed:
  • Kevin Benson
  • Ing-Haw Cheng
  • John Hull
  • Charles Martineau
  • Yoshio Nozawa
  • Vasily Strela
  • Yuntao Wu
  • Jun Yuan

Abstract

We study the drivers of the Gilchrist and Zakraj\v{s}ek (2012) excess bond premium (EBP) through the lens of the news. The monthly attention the news pays to 180 topics (Bybee et al., 2024) captures up to 80% of the variation in the EBP, and this component of variation forecasts macroeconomic movements. Greater news attention to financial intermediaries and crises tends to drive up the EBP and portend macroeconomic downturns, while greater news attention to politics and science tends to drive down the EBP. Attention-based estimates of EBP largely drive out the forecast power of direct sentiment measures for macroeconomic fluctuations and predict the business cycle going back to the early 1900's. Overall, we attribute predictive variation about the EBP for macroeconomic movements to variation in news attention to financial intermediaries, crises, and politics.

Suggested Citation

  • Kevin Benson & Ing-Haw Cheng & John Hull & Charles Martineau & Yoshio Nozawa & Vasily Strela & Yuntao Wu & Jun Yuan, 2024. "Understanding the Excess Bond Premium," Papers 2412.04063, arXiv.org.
    • Handle: RePEc:arx:papers:2412.04063
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    File URL: http://arxiv.org/pdf/2412.04063
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