We build a dynamic model to link two empirical patterns:\ the negative failure probability-return relation (Campbell, Hilscher, and Szilagyi, 2008) and the positive distress risk premium-return relation (Friewald, Wagner, and Zechner, 2014). We show analytically and quantitatively that (i)...

We 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...

Not really. Decomposing firm size (i.e., market equity) into horizon-based components, we find that size five years ago explains 80% of the current size but has little predictive power for future returns. In contrast, the change in size over the prior two to five years explains only 18% of the...

We study corporate bond default rates using an extensive new data set spanning the 1866-2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of...

We embed a structural model of credit risk inside a dynamic continuous-time consumption-based asset pricing model, which allows us to price equity and corporate debt in a unified framework. Our key economic assumptions are that the first and second moments of earnings and consumption growth...