Credit Spreads Across the Business Cycle

This paper studies how corporate bond spreads vary with the business cycle.
I show that both level and slope of empirical credit spread curves are correlated
with the state of the economy, and I link this to variation in idiosyncratic jump
risk. I develop a structural credit risk model that accounts for both business cycle
and jump risk, and show by estimation that the model captures the counter-cyclical level and pro-cyclical slope of empirical credit spread curves. In addition, I provide a new procedure for estimation of idiosyncratic jump risk, which is consistent with observed shocks to firm fundamentals.