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Economic uncertainty, disagreement, and credit markets

Buraschi, Andrea, Trojani, Fabio and Vedolin, Andrea (2011) Economic uncertainty, disagreement, and credit markets. .

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We study the link between credit spreads and the heterogeneous formation of expectations in an economy where agents with different perception of economic uncertainty disagree about future cash flows of a defaultable firm. The intertemporal risk-sharing of disagreeing investors gives rise to three testable implications: First, larger belief heterogeneity increases credit spreads and their volatility. Second, it implies a higher frequency of capital structure arbitrage violations. Third, it reduces expected equity returns of low levered firms, but the link can be reversed for high levered firms. We use a data-set of firm-level differences in beliefs, credit spreads, and stock returns to empirically test these predictions. The economic and statistical significance of the intertemporal risk-sharing channel of disagreement is substantial and robust to the inclusion of control variables such as Fama and French, liquidity, and implied volatility factors.

Item Type: Monograph (Working Paper)
Additional Information: © 2011 The authors
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
Date Deposited: 16 Apr 2012 10:32
Last Modified: 25 Jan 2021 13:24

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