Economic Uncertainty, Disagreement, and Credit Markets
Management Science, Forthcoming
38 Pages Posted: 7 Aug 2008 Last revised: 13 Oct 2013
Date Written: March 1, 2013
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.
Keywords: Credit Risk, Credit Spreads, Heterogeneous Beliefs, Uncertainty
JEL Classification: D80, G12, G13
Suggested Citation: Suggested Citation