Essays in asset pricing
File(s)
Author(s)
Anschukov, Artur
Type
Thesis
Abstract
This thesis comprises three essays in asset pricing, unified by the theme of economic crises and their impact on financial markets, investigating their effects on the dynamics of credit risk and leverage, equity and corporate debt prices, and optimal default and capital structure decisions.
Rare disasters have been shown to explain a non-trivial part of the equity risk premium. The aim of the first chapter (I) is to investigate how they affect endogenous dynamic capital structure and default decisions by firms and how these, in turn, affect the way in which rare disasters impact both the levered equity premium and credit spreads. In our model, the expectation of rare disasters makes firms more conservative in their financial policy, increasing both the equity risk premium and credit spreads while keeping the physical default probability low.
Credit Default Indices (CDX) are believed to reflect investor expectations of market stress but can exhibit unexpected behaviour when considered alongside leverage, as seen during the COVID-19 recession versus the Great Financial Crisis. In the second chapter (II), we develop a structural-equilibrium model incorporating time-varying economic conditions and small but frequent jumps to explain their joint dynamic behaviour. Our model links CDX spreads to leverage and macroeconomic conditions, where deteriorating conditions increase the likelihood of simultaneous defaults and, consequently, credit risk.
Models of learning about economic disasters generate risk premia that rise at the onset of a crisis but then fall as belief uncertainty fades. Yet, empirical risk premia remain elevated during disasters. In the third chapter (III), we resolve this tension with leverage dynamics generated by the impact of learning on optimal capital structure decisions within a representative agent consumption-based model. Optimal leverage creates a feedback effect: learning increases risk premia, thereby depressing prices and further raising leverage.
Rare disasters have been shown to explain a non-trivial part of the equity risk premium. The aim of the first chapter (I) is to investigate how they affect endogenous dynamic capital structure and default decisions by firms and how these, in turn, affect the way in which rare disasters impact both the levered equity premium and credit spreads. In our model, the expectation of rare disasters makes firms more conservative in their financial policy, increasing both the equity risk premium and credit spreads while keeping the physical default probability low.
Credit Default Indices (CDX) are believed to reflect investor expectations of market stress but can exhibit unexpected behaviour when considered alongside leverage, as seen during the COVID-19 recession versus the Great Financial Crisis. In the second chapter (II), we develop a structural-equilibrium model incorporating time-varying economic conditions and small but frequent jumps to explain their joint dynamic behaviour. Our model links CDX spreads to leverage and macroeconomic conditions, where deteriorating conditions increase the likelihood of simultaneous defaults and, consequently, credit risk.
Models of learning about economic disasters generate risk premia that rise at the onset of a crisis but then fall as belief uncertainty fades. Yet, empirical risk premia remain elevated during disasters. In the third chapter (III), we resolve this tension with leverage dynamics generated by the impact of learning on optimal capital structure decisions within a representative agent consumption-based model. Optimal leverage creates a feedback effect: learning increases risk premia, thereby depressing prices and further raising leverage.
Version
Open Access
Date Issued
2025-01-30
Date Awarded
01/12/2025
License URL
Advisor
Bhamra, Harjoat
Publisher Department
Business School
Publisher Institution
Imperial College London
Qualification Level
Doctoral
Qualification Name
Doctor of Philosophy (PhD)