Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70511
Authors: 
Gourio, François
Year of Publication: 
2012
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2012-07
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 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 time-varying 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.
Subjects: 
financial frictions
financial accelerator
systematic risk
asset pricing
credit spread puzzle
time-varying risk premium
disasters
rare events
jumps
JEL: 
E32
E44
G12
Document Type: 
Working Paper

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