Drivers and macro-forecasting mechanism of the Excess Bond Premium

Determine the economic drivers of variation in the Excess Bond Premium (EBP)—defined as the difference between average U.S. corporate credit bond spreads and model-implied default-risk spreads—and ascertain the mechanism by which variation in EBP forecasts business cycle fluctuations.

Background

The paper studies why the Excess Bond Premium (EBP) predicts macroeconomic fluctuations, using news attention to 180 topics to decompose and forecast EBP-related variation. While prior work links EBP to intermediary health, the specific drivers and channels remain debated because EBP is, by construction, a non-fundamental residual component of credit spreads.

The authors frame this as a central unresolved issue motivating their analysis, which assigns EBP variation to interpretable news topics and evaluates whether topic-induced EBP movements forecast macro variables over both modern and historical samples.