Debt Dynamics and Credit Risk

Peter Feldhütter, Stephen Schaefer

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

The dynamics of debt are crucial in structural models of credit risk, and this paper provides a theoretical and empirical examination of these dynamics. Empirically, the future level of debt in US industrial firms is negatively related to current leverage. Furthermore, when a firm experiences a negative shock to it’s equity, debt increases in the short run but declines in the long run, relative to a positive-shock firm. We incorporate these dynamics of debt into a structural model of credit risk and compare the term structure of default rates and credit spreads with those in existing models. The model improves the ability to capture the level of credit spreads, particularly at short maturities.
Original languageEnglish
Publication date2020
Number of pages70
Publication statusPublished - 2020
EventThe 55th Annual Conference of the Western Finance Association. WFA 2020 - Virtual
Duration: 19 Jun 202022 Jun 2020
Conference number: 55
https://westernfinance.org/wp-content/uploads/2020_links.pdf

Conference

ConferenceThe 55th Annual Conference of the Western Finance Association. WFA 2020
Number55
LocationVirtual
Period19/06/202022/06/2020
Internet address

Keywords

  • Structural models
  • Debt levels
  • Default rates
  • Default boundary
  • Credit risk

Cite this

Feldhütter, P., & Schaefer, S. (2020). Debt Dynamics and Credit Risk. Paper presented at The 55th Annual Conference of the Western Finance Association. WFA 2020, . https://westernfinance-portal.org/viewp.php?n=681044