Economic Fluctuations and Corporate Bond Spreads: Evidence from Canadian Bond Markets

This paper attempts to address the question whether the signaling properties of credit spreads in Canada are useful for predicting future economic activity. This It extents Gilchrist, et al. (2009) paper “Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets” by examining the predictive power of credit spreads on corporate debt for future economic activity in Canada. In this paper, the credit spreads were constructed using monthly data on prices corporate bond traded over the 2002 -2017 period issued by 60 Canadian corporations. Overall the results suggest that movements specific to credit markers account for a considerable fraction of volatility in Canadian economic activity during the period under study.