Interpretation of the Excess Bond Premium residual component

Establish a definitive interpretation of the Excess Bond Premium (EBP), the residual component of corporate credit spreads relative to fundamentals, by clarifying what the EBP residual captures in economic terms.

Background

Because EBP is the residual difference between observed credit spreads and spreads implied by measured default risk, its economic meaning has been debated, with possibilities including intermediary risk-bearing capacity, sentiment, and other non-fundamental channels.

The paper treats the lack of a conclusive interpretation as a motivating open issue and investigates topic-based news attention to shed light on what EBP may reflect.