Persistent Crises and Levered Asset Prices

57 Pages Posted: 9 Jan 2021 Last revised: 13 May 2022

See all articles by Lars-Alexander Kuehn

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business

David Schreindorfer

Arizona State University

Florian Schulz

University of Washington

Date Written: May 13, 2022

Abstract

This paper shows that standard disaster risk models are inconsistent with the behavior of stock market volatility and credit spreads during disasters. We resolve this shortcoming by incorporating persistent macroeconomic crises into a structural credit risk model. The model successfully captures the joint dynamics of aggregate consumption, financial leverage, and asset market risks, both unconditionally and during crises. Leverage provides a strong amplification mechanism for fundamental shocks because it continues to rise while crises endure. We structurally estimate the model and show that it replicates the firm-level implied volatility curve and its cross-sectional relation with observable proxies of default risk.

Keywords: Disasters, Epstein-Zin preferences, SMM, credit risk, option pricing

JEL Classification: G01,G12, G13,G32

Suggested Citation

Kuehn, Lars-Alexander and Schreindorfer, David and Schulz, Florian, Persistent Crises and Levered Asset Prices (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=3733255 or http://dx.doi.org/10.2139/ssrn.3733255

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

David Schreindorfer (Contact Author)

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States
4809656212 (Phone)

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

Florian Schulz

University of Washington

Box 353226
Seattle, WA 98195
United States

HOME PAGE: http://sites.google.com/site/schulzflor/home/personal

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
173
Abstract Views
650
rank
237,767
PlumX Metrics