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Credit Risk in General Equilibrium

  • Jürgen Eichberger
  • Klaus Rheinberger
  • Martin Summer

This paper contributes to the literature on default in general equilibrium. Borrowing and lending takes place via a clearing house (bank) which monitors agents and enforces contracts. Our model develops a concept of bankruptcy equilibrium that is a direct generalization of the standard general equilibrium model with financial markets. Borrowers may default in equilibrium and returns on loans are determined endogenously. Restricted to a special form of mean variance preferences, we derive a version of the Capital Asset Pricing Model with bankruptcy. In this case we can characterize equilibrium prices and allocations and discuss implications for credit risk modeling.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-01/cesifo1_wp4602.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4602.

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Date of creation: 2014
Handle: RePEc:ces:ceswps:_4602
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