Low Inflation: High Default Risk AND High Equity Valuations / Harjoat S. Bhamra, Christian Dorion, Alexandre Jeanneret, Michael Weber.

Format:

Book

Author/Creator:

Bhamra, Harjoat S.

Contributor:

National Bureau of Economic Research.

Dorion, Christian.

Jeanneret, Alexandre.

Weber, Michael (Professor of finance)

Series:

Working Paper Series (National Bureau of Economic Research) no. w25317.

NBER working paper series no. w25317

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Low Inflation

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.

Notes:

Print version record

November 2018.