Economic Uncertainty, Disagreement, and Credit Markets

Andrea Buraschi (), Fabio Trojani () and Andrea Vedolin ()
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Andrea Buraschi: Imperial College London, London SW7 2AZ, United Kingdom
Andrea Vedolin: London School of Economics, London WC2A 2AE, United Kingdom

Management Science, 2014, vol. 60, issue 5, 1281-1296

Abstract: We study how the equilibrium risk sharing of agents with heterogeneous perceptions of aggregate consumption growth affects bond and stock returns. Although credit spreads and their volatilities increase with the degree of heterogeneity, the decreasing risk premium on moderately levered equity can produce a violation of basic capital structure no-arbitrage relations. Using bottom-up proxies of aggregate belief dispersion, we give empirical support to the model predictions and show that risk premia on corporate bond and stock returns are systematically explained by their exposures to aggregate disagreement shocks. This paper was accepted by Jerome Detemple, finance .

Keywords: credit risk; credit spreads; heterogeneous beliefs; uncertainty (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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