Credit Market Uncertainty and Business Cycles

In this paper, we propose a novel measure of uncertainty based, unlike previous measures, solely on credit market information and on an extensive CDS dataset. More specifically, we use the CDS monthly time-series data of 225 corporate firms to construct a time-varying measure of credit market uncertainty and to investigate the relationship between credit market uncertainty and economic activity over the period 2002- 2020. We provide significant evidence that credit market uncertainty has a larger and more persistent effect on US economic activity (such as production, employment and consumption) compared to other well-known uncertainty indicators such as stock market uncertainty and macroeconomic uncertainty. We also document an uncertainty spillover effect from the financial sector to the non-financial sector. The main implication of our results is that policymakers should monitor uncertainty levels in credit markets as a complementary warning indicator for business cycles