• Mon - Fri: 10 am - 5 pm
  • Mississauga, Ontario, Canada

Global Financial Researches

Researchers are contributing to the Financial World every day.
Follow the most classic and pragmatic Researches of Financial Research Analysts.


Powered By Academy of IFRA®



2021-12-03

Equilibrium Asset Pricing with Leverage and Default

We develop a general equilibrium model linking the pricing of stocks and corporate bonds to endogenous movements in corporate leverage and aggregate volatility. The model features heterogeneous firms making optimal investment and financing decisions and connects fluctuations in macroeconomic quantities and asset prices to movements in the cross section of firms. Empirically plausible movements in leverage produce realistic asset return dynamics. Countercyclical leverage drives predictable variation in risk premia, and debt-financed growth generates a high value premium. Endogenous default produces countercyclical aggregate volatility and credit spread movements that are propagated to the real economy through their effects on investment and output.

Author - Joao F Gomes, Lukas Schmid
Journal - Journal of Finance

Source -