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Macroeconomic conditions and the puzzles of credit spreads and capital structure (2008)

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by Hui Chen
Citations:106 - 13 self
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BibTeX

@MISC{Chen08macroeconomicconditions,
    author = {Hui Chen},
    title = {Macroeconomic conditions and the puzzles of credit spreads and capital structure},
    year = {2008}
}

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Abstract

Investors demand high risk premia for defaultable claims, because (i) defaults tend to concentrate in bad times when marginal utility is high; (ii) default losses are high during such times. I build a structural model of financing and default decisions in an economy with business-cycle variations in expected growth rates and volatility, which endogenously generate countercyclical comovements in risk prices, default probabilities, and default losses. Credit risk premia in the calibrated model not only can quantitatively account for the high corporate bond yield spreads and low leverage ratios in the data, but have rich implications for firms’ financing decisions.

Keyphrases

macroeconomic condition    capital structure    credit spread    default loss    risk price    calibrated model    structural model    rich implication    credit risk premia    low leverage ratio    countercyclical comovements    business-cycle variation    expected growth rate    defaultable claim    default probability    high risk premia    bad time    marginal utility    default decision    high corporate bond yield spread   

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