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Unemployment and credit risk

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  • Bai, Hang

Abstract

Labor market frictions help explain the credit spread puzzle. In U.S. aggregate data and newly assembled U.S. industry-level and cross-country panel datasets, the relation between unemployment and credit risk is strong and positive. In a search model of equilibrium unemployment embedded with defaultable debt and capital accumulation, search frictions create downward rigidity in expected search costs, hindering firms from repaying creditors particularly in bad times and rendering corporate debt riskier. Quantitatively, the model replicates the strongly positive relation between unemployment and credit risk as well as salient features of the credit spread, including its level, volatility, cyclicality, and skewness.

Suggested Citation

  • Bai, Hang, 2021. "Unemployment and credit risk," Journal of Financial Economics, Elsevier, vol. 142(1), pages 127-145.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:1:p:127-145
    DOI: 10.1016/j.jfineco.2021.05.046
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    More about this item

    Keywords

    Default; Credit spread; Search and matching; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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