Topic: Default Risk Linkages in a Structural Credit Model

Speaker: Alexandre Jeanneret, Professor of Finance, School of Banking and Finance, The University of New South Wales

Time: 10:00am-11:30am, May 15

Location: 4-101

Abstract:

This paper proposes a novel explanation for the linkages between the default risk of borrowers. A negative idiosyncratic shock to one borrower reduces its creditworthiness but also makes another borrower a relatively larger player in the economy, increasing the latter's systematic risk. Debt costs then increase for the second borrower, tilting its decision towards an earlier default. This effect strengthens with greater refinancing needs due to shorter debt maturity, consistent with the data. Our model thereby generates positive co-movement in credit spreads, risk premia, and equity volatilities across fundamentally unrelated borrowers, providing novel insights into the interplay between credit and equity markets.

Speaker Biography:

Alexandre Jeanneret’s research interests include macro asset pricing; the valuation of sovereign debt and related credit derivatives; the analysis of currency risk and returns; the understanding of preferences and incomplete information on asset prices; and the role of inflation on corporate securities. His research has been published in leading academic journals including the Journal of Financial Economics, the Review of Financial Studies, Management Science, the Journal of Financial and Quantitative Analysis, and the Review of Finance, among others.

Alexandre has previously held an academic position at HEC Montréal, being the recipient of the Canada Research Chair in Macro Finance, and held visiting positions at Columbia Business School, Harvard University, UCLA, and University Paris-Dauphine. Prior to his academic position, he has worked as an equity analyst at MSCI Barra and as a consultant for the Fixed-Income team at the Pictet Group.