Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Konstantin Milbradt, Northwestern University
Macroeconomic Risk and Idiosyncratic Risk-taking
AbstractWe develop and estimate a dynamic model of risk-shifting over the business cycle. First, equity holders with Epstein-Zin preferences increase their taking of idiosyncratic risk substantially more than the standard model in repeated games, because they perceive the arrival probability of bad states higher than the actual probability and prefer an early resolution of macroeconomic uncertainty. Second, sudden switches to bad states and large shocks in the bad states induce the countercyclical and ``synchronized'' idiosyncratic risk. Third, combined with high market risk premium in the bad states, the clustered risk-taking generates the countercyclical idiosyncratic volatility discount on equity returns.
A Theory of Multi-Period Debt Structure
AbstractWe develop a model of multi-period debt structure. A simple trade-off between the termination threat required to make repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments, their timing, and repayment amounts. For mature firms with risky cash flows, frequent repayments maximize pledgeable income—for example, by rolling over short-term debt. In contrast, for firms with cash-flow growth or significant risk-free cash flows, adding risky repayments can decrease pledgeable income. In some cases, a single risky bullet repayment maximizes pledgeable income, effectively a long-term debt contract.
- G3 - Corporate Finance and Governance