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Interest Rates and Credit Risk

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  • Carlos González-Aguado

Abstract

CONTENTS: This paper explores the effects of shifts in interest rates on corporate leverage and default. We develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs'initial wealth is scarce. The endogenous link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee the survival of their firms. The dynamic response of leverage and default to cuts and rises in interest rates is both asymmetric and heterogenously distributed across firms.

Suggested Citation

  • Carlos González-Aguado, 2011. "Interest Rates and Credit Risk," CNMV Working Papers CNMV Working Papers no. 4, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    • Handle: RePEc:cnv:wpaper:dt_46en
    as

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    File URL: http://www.cnmv.es/DocPortal/Publicaciones/MONOGRAFIAS/DT46_weben.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    interest rates; short-term debt; search for yield; credit risk; firm dynamics.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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