Unsecured Credit Supply Risk and Bond Prices

64 Pages Posted: 1 Dec 2020 Last revised: 18 Mar 2021

Date Written: October 14, 2020

Abstract

Changes in credit supply induce large and frequent variations in households' access to unsecured debt. They generate a novel financial precautionary motive, which compounds the classical motive associated with idiosyncratic income risk, as borrowers accumulate risk-free bonds to hedge against them. Using a structural model, I estimate that this motive is an important driver of Treasury rates over the business cycle. It explains the historically low level of real rates in the last decade despite consumption growth, solving a "post-Great Recession risk-free rate puzzle". It is also critical for the volatility and comovement of household balance sheet and macroeconomic moments.

Keywords: Unsecured credit, precautionary savings, interest rates, structural estimation

JEL Classification: C63, E21, E43, G11, G12, G51

Suggested Citation

Mabille, Pierre, Unsecured Credit Supply Risk and Bond Prices (October 14, 2020). INSEAD Working Paper No. 2020/59/FIN, Available at SSRN: https://ssrn.com/abstract=3725031 or http://dx.doi.org/10.2139/ssrn.3725031

Pierre Mabille (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://www.pierremabille.com

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