Credit Risk in General Equilibrium

40 Pages Posted: 12 Feb 2014

See all articles by Jürgen Eichberger

Jürgen Eichberger

Heidelberg University - Alfred Weber Institute for Economics

Klaus Rheinberger

University of Applied Sciences Vorarlberg

Martin Summer

Oesterreichische Nationalbank (OeNB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2014

Abstract

This paper contributes to the literature on default in general equilibrium. Borrowing and lending takes place via a clearing house (bank) which monitors agents and enforces contracts. Our model develops a concept of bankruptcy equilibrium that is a direct generalization of the standard general equilibrium model with financial markets. Borrowers may default in equilibrium and returns on loans are determined endogenously. Restricted to a special form of mean variance preferences, we derive a version of the Capital Asset Pricing Model with bankruptcy. In this case we can characterize equilibrium prices and allocations and discuss implications for credit risk modeling.

Keywords: financial markets equilibrium, bankruptcy

JEL Classification: D530, G100

Suggested Citation

Eichberger, Jürgen and Rheinberger, Klaus and Summer, Martin, Credit Risk in General Equilibrium (January 31, 2014). CESifo Working Paper Series No. 4602. Available at SSRN: https://ssrn.com/abstract=2393999

Jürgen Eichberger

Heidelberg University - Alfred Weber Institute for Economics ( email )

Heidelberg, D-69117
Germany

Klaus Rheinberger

University of Applied Sciences Vorarlberg ( email )

Hochschulstr. 1
Dornbirn, A-6850
Austria

Martin Summer (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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