Working Paper: NBER ID: w21559
Authors: Peter F. Basile; Sung Won Kang; John Landon-Lane; Hugh Rockoff
Abstract: We present a new monthly index of the yield on junk (high yield) bonds from 1910-1955. We then use the index to reexamine some of the main debates about the financial history of the interwar years. A close look at junk bond yields: (1) strengthens the view that the decline in lending standards in the late 1920s was modest at best: (2) casts doubt on the view that the banking crisis that began in 1930 disrupted financial markets because banks liquidated their holdings of risky bonds; (3) strengthens the view that the cost of capital rose substantially in the early 1930s and remained high for the rest of the decade; (4) casts doubt on the view that financial markets entered a liquidity trap in the second half of the 1930s; and (5) strengthens the case for believing that junk bond yields contain some information useful for making economic forecasts.
Keywords: junk bonds; high yield bonds; financial history; Great Depression; lending standards
JEL Codes: N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stable yields on junk bonds (G12) | modest decline in lending standards (G21) |
| rise in junk bond yields prior to the banking crisis (F65) | increase in perceived risk (D81) |
| high borrowing costs in the early 1930s (F65) | increase in junk bond yields (E43) |
| monetary policy (E52) | impact on junk bond yields (E43) |
| yields on junk bonds (G12) | forecasting economic conditions (E37) |
| yields on junk bonds rose dramatically (G12) | casts doubt on liquidity trap (E41) |