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Economic Uncertainty, Disagreement, and Credit Markets

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Fabio Trojani

Swiss Finance Institute; University of Lugano

Andrea Vedolin

London School of Economics and Political Science

March 1, 2013

Management Science, Forthcoming

We study how the equilibrium risk-sharing of agents with heterogenous perceptions of aggregate consumption growth affects bond and stock returns. While credit spreads and their volatilities increase with the degree of heterogeneity, the decreasing risk premium on moderately levered equity can produce a violation of basic capital structure no-arbitrage relations. Using bottom-up proxies of aggregate belief dispersion, we give empirical support to the model predictions and show that risk premia on corporate bond and stock returns are systematically explained by their exposures to aggregate disagreement shocks.

Number of Pages in PDF File: 38

Keywords: Credit Risk, Credit Spreads, Heterogeneous Beliefs, Uncertainty

JEL Classification: D80, G12, G13

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Date posted: August 7, 2008 ; Last revised: October 13, 2013

Suggested Citation

Buraschi, Andrea and Trojani, Fabio and Vedolin, Andrea, Economic Uncertainty, Disagreement, and Credit Markets (March 1, 2013). Management Science, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1202002 or http://dx.doi.org/10.2139/ssrn.1202002

Contact Information

Andrea Buraschi
The University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)
HOME PAGE: http://www.andreaburaschi.com/

Chicago Booth School of Business Logo

Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
HOME PAGE: http://www.andreaburaschi.com/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Fabio Trojani
Swiss Finance Institute ( email )
Via G. Buffi 13
Lugano, CH-6900
HOME PAGE: http://www.people.lu.unisi.ch/trojanif

University of Lugano ( email )
Faculty of Economics
Via Buffi 13
Lugano, 6900
HOME PAGE: http://www.people.lu.unisi.ch/trojanif
Andrea Vedolin (Contact Author)
London School of Economics and Political Science ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
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References:  64
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