High-Yield Credit Spreads and Macroeconomic Fluctuations in the Euro Area: A VAR Analysis

This thesis examines the dynamic relationship between high-yield (HY) cor- porate bond spreads and key macroeconomic and financial variables in the euro area over the period 2010–2020. Using a reduced-form Vector Autoregres- sion (VAR) framework, the analysis investigates how unexpected innovations to credit risk conditions interact with industrial production, equity returns, sovereign bond yields, inflation, and monetary policy rates. Given evidence of non-stationarity in several variables, the model focuses on short-run dynamics by employing first differences where appropriate. Impulse response functions and forecast error variance decompositions indi- cate that innovations to changes in high-yield spreads are associated with weak and short-lived responses in equity returns and industrial production, while their effects on inflation and monetary policy are limited. At the same time, a substantial portion of fluctuations in high-yield spreads are explained predom- inantly by equity return innovations and own spread shocks in the generalized variance decomposition. Overall, the results suggest that high-yield spreads primarily function as an endogenous indicator of financial risk conditions, with limited evidence that they act as an independent driver of macroeconomic fluc- tuations during the sample period.