Credit Risk and Disaster Risk

47 Pages Posted: 9 May 2011 Last revised: 10 Jul 2023

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Date Written: May 2011


Corporate credit spreads are large, volatile, countercyclical, and significantly larger than expected losses, but existing macroeconomic models with financial frictions fail to reproduce these patterns, because they imply small and constant aggregate risk premia. Building on the idea that corporate debt, while safe in normal times, is exposed to the risk of economic depression, this paper embeds a trade-off theory of capital structure into a real business cycle model with a small, time-varying risk of large economic disaster. This simple feature generates large, volatile and countercyclical credit spreads as well as novel business cycle implications. In particular, financial frictions substantially amplify the effect of shocks to the disaster probability.

Suggested Citation

Gourio, Francois, Credit Risk and Disaster Risk (May 2011). NBER Working Paper No. w17026, Available at SSRN:

Francois Gourio (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States


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