Credit risk and disaster risk

Francois Gourio

No WP-2012-07, Working Paper Series from Federal Reserve Bank of Chicago

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.

Keywords: Risk - Mathematical models; Credit; Debt (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-dge, nep-rmg and nep-upt
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Credit Risk and Disaster Risk (2013)
Working Paper: Credit Risk and Disaster Risk (2011)
Working Paper: Credit Risk and Disaster Risk (2011)
Working Paper: Credit risk and Disaster risk (2010)
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