Essays on bankruptcy, credit risk and asset pricing

Abstract

In this dissertation, I consider a range of topics in bankruptcy, credit risk and asset pricing. The first chapter proposes a structural-equilibrium model to examine some economic implications arising from voluntary filing of Chapter 11. The results suggest that conflict of interests (between debtors and creditors) arising from the voluntary filing option causes countercyclical losses in firm value. The base calibration shows that these losses amount to approximately 5% of the ex-ante firm value and are twice those produced by a model without incorporating the business cycles. Furthermore, besides countercyclical liquidation costs as in Chen (2010) and Bhamra, Kuehn and Strebulaev (2010), countercyclical pre-liquidation distress costs and the conflict of interests help to generate reasonable credit spreads, levered equity premium and leverage ratios. The framework nests several important models and prices the firm’s contingent claims in closed-form. The second chapter proposes a structural credit risk model with stochastic asset volatility for explaining the credit spread puzzle. The base calibration indicates that the model helps explain the credit spread puzzle with a reasonable volatility risk premium. The model fits well to the dynamics of CDS spreads and equity volatility in the data. The third chapter develops a consumption-based learning model to study the interactions among aggregate liquidity, asset prices and macroeconomic variables in