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Credit risk and Disaster risk

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  • Francois Gourio

    (Boston University)

Abstract

Credit spreads are large, volatile and countercyclical, and recent empirical work suggests that risk premia, not expected credit losses, are responsible for these features. Building on the idea that corporate debt, while safe in ordinary recessions, is exposed to economic depressions, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, exogenously time-varying risk of economic disaster. The model replicates the level, volatility and cyclicality of credit spreads, and variation in the corporate bond risk premium amplifies macroeconomic fluctuations in investment, employment and GDP.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 112.

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Date of creation: 2010
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Handle: RePEc:red:sed010:112

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Citations

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Cited by:
  1. Robert J. Barro & José F. Ursua, 2011. "Rare Macroeconomic Disasters," NBER Working Papers 17328, National Bureau of Economic Research, Inc.
  2. Zheng Liu & Sylvain Leduc, 2013. "Uncertainty Shocks Are Aggregate Demand Shocks," 2013 Meeting Papers, Society for Economic Dynamics 270, Society for Economic Dynamics.
  3. Martin Schneider & Cosmin Ilut & Francesco Bianchi, 2013. "Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle," 2013 Meeting Papers, Society for Economic Dynamics 202, Society for Economic Dynamics.
  4. 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.
  5. Serena Ng & Jonathan H. Wright, 2013. "Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling," NBER Working Papers 19469, National Bureau of Economic Research, Inc.
  6. Sylvain, Serginio, 2014. "Does Human Capital Risk Explain The Value Premium Puzzle?," MPRA Paper 54551, University Library of Munich, Germany.
  7. 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.
  8. 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.
  9. 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).
  10. Eric T. Swanson, 2012. "Risk aversion, risk premia, and the labor margin with generalized recursive preferences," Working Paper Series 2012-17, Federal Reserve Bank of San Francisco.
  11. 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.
  12. 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.
  13. 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.

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