One Risk, Two Debts: The Effects of Rare Disasters on Credit Markets

65 Pages Posted: 30 Mar 2021

See all articles by Hui Xu

Hui Xu

Lancaster University - Lancaster University Management School

Abstract

The COVID-19 pandemic has highlighted the impacts that rare disasters can have on credit markets. We discuss and quantify the asset-pricing implications of disaster risk on the risk-free rate, credit spreads, and their term structures. The findings underscore the heterogeneous effects of disasters on the risk-free and risky debt segments of credit markets. The results reveal that federal and private debt are ``two sides of the same coin”, call for a closer coordination between these two distinct sectors of the credit market, and shed light on deleveraging issues that likely lie ahead in the post-disaster world.

Keywords: COVID-19, Disaster Risk, De-leverage, Debt Default, Credit Markets

JEL Classification: G12, G14, G18

Suggested Citation

Xu, Hui, One Risk, Two Debts: The Effects of Rare Disasters on Credit Markets. Available at SSRN: https://ssrn.com/abstract=3815053 or http://dx.doi.org/10.2139/ssrn.3815053

Hui Xu (Contact Author)

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

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