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Persistent Crises and Levered Asset Prices

Author

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  • Lars-Alexander Kuehn
  • David Schreindorfer
  • Florian Schulz

Abstract

This paper shows that standard disaster risk models are inconsistent with movements in stock market volatility and credit spreads during disasters. We resolve this shortcoming by incorporating persistent macroeconomic crises into a structural credit risk model. The model successfully captures the joint dynamics of aggregate consumption, financial leverage, and asset market risks, both unconditionally and during crises. Leverage strongly amplifies fundamental shocks by continuing to rise while crises endure. We structurally estimate the model and show that it replicates the firm-level implied volatility curve and its cross-sectional relation with observable proxies of default risk.

Suggested Citation

  • Lars-Alexander Kuehn & David Schreindorfer & Florian Schulz, 2023. "Persistent Crises and Levered Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 36(6), pages 2571-2616.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:6:p:2571-2616.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac081
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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