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Inflation Risk in Corporate Bonds
Author(s) -
KANG JOHNNY,
PFLUEGER CAROLIN E.
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12195
Subject(s) - economics , monetary economics , bond , volatility (finance) , business cycle , corporate debt , deflation , inflation (cosmology) , default risk , debt , stock (firearms) , econometrics , corporate bond , credit risk , monetary policy , macroeconomics , finance , mechanical engineering , physics , theoretical physics , engineering
ABSTRACT We argue that corporate bond yields reflect fears of debt deflation. When debt is nominal, unexpectedly low inflation increases real liabilities and default risk. In a real business cycle model with optimal but infrequent capital structure choice, more uncertain or procyclical inflation leads to quantitatively important increases in corporate log yields in excess of default‐free log yields. A panel of credit spread indexes from six developed countries shows that credit spreads rise by 14 basis points if inflation volatility or the inflation‐stock correlation increases by one standard deviation.