IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Credit Risk and Disaster Risk

  • François Gourio

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 fairly 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 timevarying 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.5.3.1
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/data/2011-0064_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/data/2011-0064_app.pdf
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/ds/0503/2011-0064_ds.pdf
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/data/2011-0064_data.zip
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/app/2011-0064_app.pdf
Download Restriction: no

File URL: http://www.aeaweb.org/aej/mac/ds/0503/2011-0064_ds.zip
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 3 (July)
Pages: 1-34

as
in new window

Handle: RePEc:aea:aejmac:v:5:y:2013:i:3:p:1-34
Note: DOI: 10.1257/mac.5.3.1
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-61, October.
  2. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
  3. Lettau, M. & Uhlig, H.F.H.V.S., 1995. "Can Habit Formation be Reconciled with Business Cycle Facts?," Discussion Paper 1995-54, Tilburg University, Center for Economic Research.
  4. Harjoat S. Bhamra & Lars-Alexander Kuehn & Ilya A. Strebulaev, 2010. "The Levered Equity Risk Premium and Credit Spreads: A Unified Framework," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 645-703, February.
  5. Jose Ursua & Jon Steinsson & Emi Nakamura & Robert Barro, 2008. "Crises and Recoveries in an Empirical Model of Consumption Disasters," 2008 Meeting Papers 1089, Society for Economic Dynamics.
  6. John Y. Campbell, 1998. "Asset Prices, Consumption, and the Business Cycle," NBER Working Papers 6485, National Bureau of Economic Research, Inc.
  7. David Backus & Mikhail Chernov & Ian Martin, 2009. "Disasters implied by equity index options," NBER Working Papers 15240, National Bureau of Economic Research, Inc.
  8. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  9. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
  10. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  11. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices kehoe02, Review of Economic Dynamics.
  12. Simon Gilchrist & Fabio M. Natalucci & Egon Zakrajsek, 2007. "Investment and the Cost of Capital: New Evidence from the Corporate Bond Market," Boston University - Department of Economics - Working Papers Series WP2007-027, Boston University - Department of Economics.
  13. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
  14. Francis Longstaff & Monika Piazzesi, 2003. "Corporate Earnings and the Equity Premium," NBER Working Papers 10054, National Bureau of Economic Research, Inc.
  15. Lettau, Martin & Ludvigson, Sydney, 2002. "Time-varying risk premia and the cost of capital: An alternative implication of the Q theory of investment," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 31-66, January.
  16. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  17. Simon Gilchrist & Jae W. Sim & Egon Zakrajšek, 2014. "Uncertainty, Financial Frictions, and Investment Dynamics," NBER Working Papers 20038, National Bureau of Economic Research, Inc.
  18. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  19. Aude Pommeret & Anne Epaulard, 2001. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," IMF Working Papers 01/5, International Monetary Fund.
  20. Dario Caldara & Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Wen Yao, 2009. "Computing DSGE Models with Recursive Preferences," NBER Working Papers 15026, National Bureau of Economic Research, Inc.
  21. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  22. Thomas Cooley & Ramon Marimon & Vicenzo Quadrini, 1999. "Aggregate consequences of limited contract enforceability," Economics Working Papers 843, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2003.
  23. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Research 143, National Bank of Belgium.
  24. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers RPF-233, University of California at Berkeley.
  25. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2009. "Investment Shocks and the Relative Price of Investment," CEPR Discussion Papers 7598, C.E.P.R. Discussion Papers.
  26. Brent Glover & Joao Gomes & Amir Yaron, . "Corporate Taxes, Leverage, and Business Cycles," GSIA Working Papers 2011-E24, Carnegie Mellon University, Tepper School of Business.
  27. Vladimir Yankov & Egon Zakrajsek & Simon Gilchrist, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," 2009 Meeting Papers 514, Society for Economic Dynamics.
  28. Ian Martin, 2010. "Consumption-Based Asset Pricing with Higher Cumulants," NBER Working Papers 16153, National Bureau of Economic Research, Inc.
  29. Dirk Hackbarth & Jianjun Miao & Erwan Morellec, 2004. "Capital Structure, Credit Risk, and Macroeconomic Conditions," FAME Research Paper Series rp125, International Center for Financial Asset Management and Engineering.
  30. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
  31. repec:rim:rimwps:07-07 is not listed on IDEAS
  32. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  33. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  34. Thomas Philippon, 2009. "The Bond Market's q," The Quarterly Journal of Economics, Oxford University Press, vol. 124(3), pages 1011-1056.
  35. Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
  36. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  37. CAMPANALE, Claudio & CASTRO, Rui & CLEMENTI, Gian Luca, 2009. "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Cahiers de recherche 10-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  38. Anisha Ghosh & Christian Julliard, 2008. "Can Rare Events Explain the Equity Premium Puzzle?," 2008 Meeting Papers 1090, Society for Economic Dynamics.
  39. G. William Schwert, 1988. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  40. Long Chen & Pierre Collin-Dufresne & Robert S. Goldstein, 2009. "On the Relation Between the Credit Spread Puzzle and the Equity Premium Puzzle," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3367-3409, September.
  41. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  42. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
  43. Eric T. Swanson, 2012. "Risk Aversion and the Labor Margin in Dynamic Equilibrium Models," American Economic Review, American Economic Association, vol. 102(4), pages 1663-91, June.
  44. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  45. Marika Santoro & Chao Wei, 2011. "Taxation, Investment and Asset Pricing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 443-454, July.
  46. Rui Castro & Claudio Campanale & Gian Luca Clementi, 2007. "Asset Pricing in a General Equilibrium Production Economy with Chew-Dekel Risk Preferences," 2007 Meeting Papers 503, Society for Economic Dynamics.
  47. Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers 47, Society for Economic Dynamics.
  48. Tom Krebs, 2003. "Human Capital Risk and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 118(2), pages 709-744.
  49. Robert J. Barro & Robert G. King, 1984. "Time-Separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 817-839.
  50. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  51. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "New Keynesian Models: Not Yet Useful for Policy Analysis," NBER Working Papers 14313, National Bureau of Economic Research, Inc.
  52. Larry E. Jones & Rodolfo E. Manuelli & Henry E. Siu, 2005. "Fluctuations in Convex Models of Endogenous Growth II: Business Cycle Properties," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 805-828, October.
  53. Jaccard, Ivan, 2010. "Asset pricing, habit memory, and the labor market," Working Paper Series 1163, European Central Bank.
  54. Timothy J. Kehoe & Edward C. Prescott(), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, number 2007gdott.
  55. Gourio, François, 2008. "Time-series predictability in the disaster model," Finance Research Letters, Elsevier, vol. 5(4), pages 191-203, December.
  56. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  57. Darrell DUFFIE & Andreas ECKNER & Guillaume HOREL & Leandro SAITA, . "Frailty Correlated Default," Swiss Finance Institute Research Paper Series 08-44, Swiss Finance Institute.
  58. Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-66, June.
  59. Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November.
  60. Levy, Amnon & Hennessy, Christopher, 2007. "Why does capital structure choice vary with macroeconomic conditions?," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1545-1564, September.
  61. Georg Kaltenbrunner & Lars Lochstoer, 2007. "Long-Run Risk through Consumption Smoothing," 2007 Meeting Papers 25, Society for Economic Dynamics.
  62. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
  63. Lukas Schmid & Joao Gomes, 2009. "Equilibrium Credit Spreads and the Macroeconomy," 2009 Meeting Papers 1109, Society for Economic Dynamics.
  64. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  65. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, vol. 102(6), pages 2734-66, October.
  66. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, March.
  67. Jessica Wachter, 2008. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," NBER Working Papers 14386, National Bureau of Economic Research, Inc.
  68. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  69. Zheng Liu & Pengfei Wang & Tao Zha, 2010. "Do credit constraints amplify macroeconomic fluctuations?," FRB Atlanta Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  70. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
  71. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  72. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, vol. 101(2), pages 877-99, April.
  73. Harjoat S. Bhamra & Lars-Alexander Kuehn & Ilya A. Strebulaev, 2010. "The Aggregate Dynamics of Capital Structure and Macroeconomic Risk," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4187-4241, December.
  74. Sanjiv R. Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2007. "Common Failings: How Corporate Defaults Are Correlated," Journal of Finance, American Finance Association, vol. 62(1), pages 93-117, 02.
  75. Larry E. Jones & Rodolfo E. Manuelli & Henry E. Siu & Ennio Stacchetti, 2005. "Fluctuations in Convex Models of Endogenous Growth I: Growth Effects," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 780-804, October.
  76. Thomas Tallarini, . "Risk-Sensitive Real Business Cycles," GSIA Working Papers 1997-35, Carnegie Mellon University, Tepper School of Business.
  77. Jianjun Miao & PENGFEI WANG, 2010. "Credit Risk and Business Cycles," Boston University - Department of Economics - Working Papers Series WP2010-033, Boston University - Department of Economics.
  78. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  79. repec:dgr:kubcen:199554 is not listed on IDEAS
  80. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
  81. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 823-866.
  82. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  83. Francois Gourio, 2008. "Disasters and Recoveries," American Economic Review, American Economic Association, vol. 98(2), pages 68-73, May.
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Canadian Macro Study Group
  2. Credit Risk and Disaster Risk (AEJ:MA 2013) in ReplicationWiki

When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:5:y:2013:i:3:p:1-34. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.