Adrien d’Avernas (UCLA)
13 February 2017 @ 12:00
“Disentangling Credit Spreads and Equity Volatility”
In this paper, I provide a structural approach to quantify the forces thatgovern the joint dynamics of corporate bond credit spreads and equityvolatility. I build a dynamic model and estimate a wide array of fundamentalshocks using a large firm-level database on credit spreads, equityprices, accounting statements, and bond recovery ratios in the U.S. from1973 to 2014. A structural decomposition reveals that the joint dynamicsof credit spreads and equity volatility is driven by fluctuations infirms’ asset values and aggregate asset volatility. I find that aggregateasset volatility captures the informational content of credit spreads forpredicting economic activity. All together, my results suggest that aggregateasset volatility is key for the transmission channel that links thefundamental drivers of financial indicators to the real economy.