Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure

@article{Chen2009MacroeconomicCA,
  title={Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure},
  author={H. Chen},
  journal={Macroeconomics: Prices},
  year={2009}
}
  • H. Chen
  • Published 2009
  • Business, Economics
  • Macroeconomics: Prices
I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations in risk prices, default probabilities, and default losses arise endogenously through firms' responses to the macroeconomic conditions. These comovements generate large credit risk premia for investment grade firms, which helps address the "credit spread puzzle" and… Expand
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