Credit Risk and Disaster Risk

Francois Gourio

No 17026, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Corporate credit spreads are large, volatile, countercyclical, and significantly larger than expected losses, but existing macroeconomic models with financial frictions fail to reproduce these patterns, because they imply small and constant aggregate risk premia. Building on the idea that corporate debt, while safe in normal times, is exposed to the risk of economic depression, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, time-varying risk of large economic disaster. This simple feature generates large, volatile and countercyclical credit spreads as well as novel business cycle implications. In particular, financial frictions substantially amplify the effect of shocks to the disaster probability.

JEL-codes: E22 E32 E44 G12 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-rmg
Note: AP CF EFG ME
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Citations: View citations in EconPapers (9)

Published as François Gourio, 2013. "Credit Risk and Disaster Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 1-34, July.

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Related works:
Journal Article: Credit Risk and Disaster Risk (2013)
Working Paper: Credit risk and disaster risk (2012)
Working Paper: Credit Risk and Disaster Risk (2011)
Working Paper: Credit risk and Disaster risk (2010)
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