Understanding the Excess Bond Premium

TL;DR

This paper investigates the drivers of the excess bond premium (EBP) by analyzing news attention to various topics, showing that news focus on financial and political issues explains most of its variation and forecasts macroeconomic movements.

Contribution

It introduces a news-based approach to explain and predict the EBP, highlighting the role of news attention to specific topics in macroeconomic forecasting.

Findings

News attention explains up to 80% of EBP variation.

Attention to financial intermediaries and crises increases EBP and predicts downturns.

Attention to politics and science decreases EBP and signals economic stability.

Abstract

We study the drivers of the Gilchrist and Zakraj\v{s}ek (2012) excess bond premium (EBP) through the lens of the news. The monthly attention the news pays to 180 topics (Bybee et al., 2024) captures up to 80% of the variation in the EBP, and this component of variation forecasts macroeconomic movements. Greater news attention to financial intermediaries and crises tends to drive up the EBP and portend macroeconomic downturns, while greater news attention to politics and science tends to drive down the EBP. Attention-based estimates of EBP largely drive out the forecast power of direct sentiment measures for macroeconomic fluctuations and predict the business cycle going back to the early 1900's. Overall, we attribute predictive variation about the EBP for macroeconomic movements to variation in news attention to financial intermediaries, crises, and politics.