Credit Risk and Disaster Risk

Francois Gourio

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 3, 1-34

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 fairly 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 timevarying 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.

JEL-codes: E13 E22 E23 E24 E32 E44 G32 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.3.1
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Citations: View citations in EconPapers (114)

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Related works:
Working Paper: Credit risk and disaster risk (2012)
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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