Abstract

We assess whether the relation between US Treasury yields and the corporate bond yield spread has been stable over time. This is done by estimating hybrid time-varying parameter Bayesian VAR models with stochastic volatility where we - as a methodological contribution - also allow for disturbances with heavy tails. We analyse monthly data from April 1953 to February 2023 both within- and out-of-sample. Our results indicate that the relation has not been stable; more specifically, there is evidence that the equation of the corporate bond yield spread is subject to time-variation in its parameters. We also find that an increase in the corporate bond yield spread decreases the risk free rate. Finally, we note that while allowing for heavy tails receives a fair amount of support within sample, it appears to be of more limited importance from a forecasting perspective.