Rare Disasters and Credit Market Puzzles
نویسندگان
چکیده
We embed systematic default, procyclical recovery rates and habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to the real economy—and not to bond prices—can simultaneously explain several key empirical regularities in credit markets. Our model captures the empirical level and volatility of credit spreads, generates a flexible credit risk term structure, and provides a good fit to a century of observed spreads. The model also matches the widespread skewness in index options. Finally, our model reveals a nonlinear relationship between bond and option prices that depends on the state of the economy and that helps explain conflicting empirical evidence found in the literature. JEL codes: C60, G12, G13
منابع مشابه
Variable Rare Disasters: A Tractable Theory of Ten Puzzles in Macro-Finance
Thomas A. Rietz (1988) proposes that the possibility of rare disasters (such as economic depressions or wars) is a major determinant of asset risk premia. Robert J. Barro (2006) shows that, internationally, disasters have been sufficiently frequent and large enough to make the Rietz proposal viable, and they account for a high equity premium. The Rietz-Barro hypothesis is almost always formulat...
متن کاملA Credit Market Theory of the Money Supply and an Explanation of Two Puzzles in U.S. Monetary Policy
متن کامل
Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles? By SUMIT AGARWAL, PAIGE
Among the many important questions highlighted by recent events in the nancial sector, one concerns the features and determinants of the liability side of households' balance sheets, and a second concerns the measurement of household creditworthiness. Had households taken on and accumulated debt with more wisdom and caution, and had lenders obtained and relied on more meaningful measures of cre...
متن کاملDisasters and Development: Natural Disasters, Credit Constraints and Economic Growth
We demonstrate, using a simple two-period equilibrium model of the economy, the potential effects of extreme event occurrences such as natural or humanitarian disasters on economic growth over the mediumto long-term. In particular, we focus on the effect of such shocks on investment. We examine two polar cases; an unconstrained economy where agents have access to perfect capital markets, versus...
متن کاملEstimation methods for Value at Risk
In the last few decades, risk managers have truly experienced a revolution. The rapid increase in the usage of risk management techniques has spread well beyond derivatives and is totally changing the way institutions approach their financial risk. In response to the financial disasters of the early 1990s a new method called VaR (Value at Risk) was developed as a simple method to quantify marke...
متن کامل