Three essays on the U.S. credit market

On Friday 13 September 2024 Diego Bonelli will hold a trial lecture on a prescribed topic and defend his thesis for the PhD degree at NHH.

Diego Bonelli´s dissertation consists of three essays on the U.S. credit market, shedding light on how inflation risk and OTC market frictions impact asset prices.

The first chapter investigates the role of inflation risk in explaining the unexplained variation in U.S. corporate bond yield spreads. Traditional credit risk factors do not fully account for this variation. The study hypothesizes that inflation risk, captured through three proxies — expected inflation, inflation uncertainty, and economic cyclicality — significantly influences yield spreads. A structural model shows that while expected inflation reduces the real value of debt and default risk, inflation uncertainty increases asset volatility, raising default risk. The model’s predictions are supported empirically, indicating that inflation risk is crucial in understanding yield spread changes.

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On Thursday 12 September 2024 Jareef Bin Martuza will hold a trial lecture on a prescribed topic and defend his thesis for the PhD degree at NHH.

The second chapter, co-authored with Berardino Palazzo and Ram Yamarthy, examines how the time-varying relationship between inflation and real economic growth affects the sensitivity of corporate credit spreads and equity returns to inflation shocks. Depending on whether inflation aligns with economic growth ("good inflation”) or opposes it ("bad inflation”), the impact on credit spreads and equity returns differs. In “good inflation” regimes, credit spreads decrease, and equity values rise. In “bad inflation” regimes, these effects weaken or reverse. The study uses macroeconomic announcements and high-frequency inflation-swaps data to validate the theoretical model, showing that market reactions to inflation vary with the perceived nature of inflation.

The third chapter, co-authored with Katsiaryna Falkovich and Nils Friewald, explores how momentum effects in corporate bonds are connected to the structure of the over-the-counter (OTC) market. The study shows that bonds covered by the same analysts experience momentum spillovers, particularly those with higher trading frictions.

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On Friday 30 August 2024 Cosku Can Orhan will hold a trial lecture on a prescribed topic and defend his thesis for the PhD degree at NHH.

Bonds trading on the periphery of the dealer network show stronger spillovers, suggesting delayed responses due to search frictions, while centrally traded bonds have minimal spillovers. This highlights how trading difficulties in the OTC market amplify momentum effects, especially for less liquid bonds.