Interest Rates and Credit Risk

Carlos González-Aguado

CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

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.

Keywords: interest rates; short-term debt; search for yield; credit risk; firm dynamics. (search for similar items in EconPapers)
JEL-codes: E52 G32 G33 (search for similar items in EconPapers)
Date: 2011
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