Cyclical Dispersion in Expected Defaults

61 Pages Posted: 10 Apr 2017 Last revised: 11 Aug 2020

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Marco Grotteria

London Business School

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 13, 2018

Abstract

A growing literature shows that credit indicators forecast aggregate real outcomes. While the literature has proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes.

Keywords: Expected Default, Bond Issuance, Business Cycles, Disaster Risk

JEL Classification: G12, G32, E32

Suggested Citation

Gomes, João F. and Grotteria, Marco and Wachter, Jessica A., Cyclical Dispersion in Expected Defaults (March 13, 2018). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=2949447 or http://dx.doi.org/10.2139/ssrn.2949447

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/

Marco Grotteria

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/marcogrotteria/

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
609
Abstract Views
2,989
rank
46,518
PlumX Metrics