Economic Policy uncertainty and volatility of corporate bond credit spread: Evidence from China and U.S.

This paper examines the impact of economic policy uncertainty(EPU) on volatility of corporate bond credit spread in China and U.S. for the period of January 2014 to July 2021. By constructing one-sided filtering single-factor and multi-factors GARCH-MIDAS model in which monthly economic policy uncertainty and daily corporate bond credit spread are used as variables with different frequencies, the total volatility of corporate bond credit spread is decomposed into long-term volatility component and short-term volatility component. We find that level and volatility of economic policy uncertainty have a positive impact on the long-term volatility of corporate bond credit spread with different ratings, respectively. Moreover, the level of EPU contributes to more than 12% to the total volatility of corporate bond credit spread in the Chinese samples and more than 4.31% in U.S. samples. While the variance of EPU contributes to over 5.19% to the total volatility of corporate bond credit spread in U. S. samples, which is more than that of the Chinese samples.