Equilibrium Credit Spreads and the Macroeconomy

46 Pages Posted: 18 Mar 2009 Last revised: 15 Jun 2011

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Lukas Schmid

Duke University - The Fuqua School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 2010

Abstract

Credit markets play an important role in the macroeconomy and credit market data is often used to predict future macroeconomic performance. In this paper we propose a tractable general equilibrium asset pricing model with heterogeneous firms that links movements in stock and bond markets to macroeconomic activity. The model suggests that movements in risk premia in corporate bond markets are an important determinant of aggregate fluctuations. We show that movements in credit and term spreads forecast recessions by predicting future movements in corporate investment. Endogenous movements in credit markets allow our model to match the observed conditional and unconditional movements in stock market returns and credit spreads with a reasonable amount of aggregate volatility.

Keywords: Credit Spreads, Capital Structure, Equity Premium, Predictability, General Equilibrium

JEL Classification: G12, G31, E32

Suggested Citation

Gomes, João F. and Schmid, Lukas, Equilibrium Credit Spreads and the Macroeconomy (September 2010). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1363840 or http://dx.doi.org/10.2139/ssrn.1363840

João F. Gomes

The Wharton School ( email )

2329 SH-DH
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3666 (Phone)
215-898-6200 (Fax)

HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Lukas Schmid (Contact Author)

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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