Credit risk and disaster risk
By: Francois Gourio
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 17026; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17026.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/21/2011.

Includes bibliographical references.

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