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Credit Risk and Disaster Risk

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  • Francois Gourio

Abstract

Corporate credit spreads are large, volatile, countercyclical, and significantly larger than expected losses, but existing macroeconomic models with financial frictions fail to reproduce these patterns, because they imply small and constant aggregate risk premia. Building on the idea that corporate debt, while safe in normal times, is exposed to the risk of economic depression, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, time-varying risk of large economic disaster. This simple feature generates large, volatile and countercyclical credit spreads as well as novel business cycle implications. In particular, financial frictions substantially amplify the effect of shocks to the disaster probability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17026.

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Date of creation: May 2011
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Publication status: published as François Gourio, 2013. "Credit Risk and Disaster Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 1-34, July.
Handle: RePEc:nbr:nberwo:17026

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Cited by:
  1. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Rare Disasters: Implications for Consumptions and Asset Prices," CEU Working Papers, Department of Economics, Central European University 2014_2, Department of Economics, Central European University.
  2. Robert J. Barro & José F. Ursua, 2011. "Rare Macroeconomic Disasters," NBER Working Papers 17328, National Bureau of Economic Research, Inc.
  3. Francesco Bianchi & Cosmin L. Ilut & Martin Schneider, 2014. "Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle," NBER Working Papers 20081, National Bureau of Economic Research, Inc.
  4. Zheng Liu & Sylvain Leduc, 2013. "Uncertainty Shocks Are Aggregate Demand Shocks," 2013 Meeting Papers, Society for Economic Dynamics 270, Society for Economic Dynamics.
  5. Elías Albagli & Christian Hellwig & Aleh Tsyvinski, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," Working Papers Central Bank of Chile, Central Bank of Chile 720, Central Bank of Chile.
  6. Eric Swanson, 2013. "Implications of Labor Market Frictions for Risk Aversion and Risk Premia," 2013 Meeting Papers, Society for Economic Dynamics 1137, Society for Economic Dynamics.
  7. Sylvain, Serginio, 2014. "Does Human Capital Risk Explain The Value Premium Puzzle?," MPRA Paper 54551, University Library of Munich, Germany.
  8. Peter Christoffersen & Du Du & Redouane Elkamhi, 2013. "Rare Disasters and Credit Market Puzzles," CREATES Research Papers 2013-45, School of Economics and Management, University of Aarhus.
  9. Jianjun Miao & PENGFEI WANG, 2010. "Credit Risk and Business Cycles," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2010-033, Boston University - Department of Economics.
  10. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices," CERGE-EI Working Papers wp507, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  11. Serena Ng & Jonathan H. Wright, 2013. "Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 51(4), pages 1120-54, December.
  12. Grammig, Joachim & Sönksen, Jantje, 2014. "Consumption-based asset pricing with rare disaster risk," CFR Working Papers 14-06, University of Cologne, Centre for Financial Research (CFR).
  13. Eric T. Swanson, 2012. "Risk aversion, risk premia, and the labor margin with generalized recursive preferences," Working Paper Series, Federal Reserve Bank of San Francisco 2012-17, Federal Reserve Bank of San Francisco.

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