Credit Risk and the Macro Economy in an Affine Term Structure Model

Speck, Christian

Document Type: Conference presentation
Year of publication: 2011
Conference title: AFFI - 28th International Conference
Location of the conference venue: Montpellier
Date of the conference: 11.5.2011
Publication language: English
Institution: Business School > ABWL u. Finanzierung (Theissen 2009-)
Subject: 330 Economics
Classification: JEL: E43 , E44 , E47 , G01 , G12,
Abstract: The interrelations between corporate lending conditions and the macro economy are becoming increasingly important, particularly in the context of bank regulation and monetary policy. In this paper, I develop a joint affine macro-finance model of the term structures of US Treasury yields and US corporate bond yields. A model with inflation, industrial production growth and three latent factors is able to explain the dynamics of a wide range of rating classes and maturities. An economy-wide latent credit risk factor is identified to study the role of credit conditions in the business cycle. In-sample model dynamics and out-of-sample macroeconomic forecasts provide evidence that credit conditions contain information about the business cycle that are not contained in the Treasury term structure. Therefore, credit conditions form an integral part of the transmission process of monetary policy and highlight the necessity to integrate credit information into policymakers' theoretical business cycle models.

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