Cyclical Dispersion in Expected Defaults / João F. Gomes, Marco Grotteria, Jessica A. Wachter.

Format:

Book

Author/Creator:

Gomes, João F.

Contributor:

National Bureau of Economic Research.

Grotteria, Marco.

Wachter, Jessica A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23704.

NBER working paper series no. w23704

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.

Notes:

Print version record

August 2017.