Cyclical Dispersion in Expected Defaults

João Gomes (), Marco Grotteria and Jessica Wachter ()

No 23704, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.

JEL-codes: E32 G12 G32 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-cfn and nep-mac
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Published as João F Gomes & Marco Grotteria & Jessica A Wachter, 2019. "Cyclical Dispersion in Expected Defaults," The Review of Financial Studies, vol 32(4), pages 1275-1308.

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Journal Article: Cyclical Dispersion in Expected Defaults (2019)
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