Cyclical Dispersion in Expected Defaults
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Gomes J F;Grotteria M;Wachter J A
Biographies
Publication Year
2019
Abstract
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.
Available on ECCH
No
