Journal of Finance and Investment Analysis

Commercial Paper Rates and Stock Market Excess Returns

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• Abstract

  This study investigates how commercial paper rates respond to the innovations in stock market risk premiums. The unrestricted vector autoregression (VAR) analysis of monthly data from 1997:1 to 2012:M6 shows that the changes in the one-, two-, and three-month non-financial and financial commercial paper rates positively respond to the innovations in the excess returns on the CRSP value weighted index. The response is especially strong during the first few months following shocks to stock market risk premiums. The Granger-causality test results show the changes in commercial paper rates can be predicted by the excess returns on the CRSP value weighted index. The findings from this study provide evidence that there is a link between equity market and commercial paper market.