Credit Spread News and Financial Market Risk

This paper shows that credit spread news, defined by changes and absolute changes in corporate bond credit spreads, predict a substantial share of future variation in financial market risk. I first document a strong and robust predictive relationship between credit spread news and financial market risk. I then investigate the economic mechanism underlying this relationship and provide both theoretical and empirical evidence highlighting a central role for financial intermediaries' risk expectations. Together, these findings establish credit spread news as statistically significant and economically meaningful predictors of financial market risk.