Abstract

How can one forecast the returns to corporate credit? We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. Our key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. Drawing on a database of corporate debt issuance starting in 1926, we show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns 

Bio

Robin Greenwood is the George Gund Professor of Finance and Banking at Harvard Business School. His research investigates market inefficiency at the macro-level, with a special emphasis on debt markets. Professor Greenwood received a Ph.D. from Harvard in Economics, and B.S. degrees in Economics and Mathematics at MIT. He has taught in both years of the MBA finance curriculum and various Executive Education Programs, and is the chair of the Finance for Senior Executives Program.  Since Spring 2009, he has been teaching Behavioral and Value Investing, a second year elective. He is a Faculty Research Associate at the National Bureau of Economic Research and an associate editor at the Review of Financial Studies.

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