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Disentangling Credit Spreads, Equity Volatility, and Leverage


This dissertation studies the aggregate dynamics of important financial indicators such as corporate bond credit spreads, equity volatility, and firms' leverage. Chapter 1 investigates empirical regularities that relates theses indicators, both over the business cycle and in the cross-section, to motivate the foundations of a structural model. I find that a time-varying factor common to corporate bond credit spreads, equity volatility, and leverage drives the dynamics of these indicators.

Chapter 2 develops a structural model to account quantitatively for and disentangle the sources of these common dynamics in corporate bond credit spreads, firms' leverage, and equity volatility. In order to fit the data, I extend the framework of \citet*{chen16} to accommodate a large state space.

Chapter 3 addresses the estimation procedure of fundamental shocks to financial indicators using this structural model together with a large firm-level panel dataset. The results suggest that fluctuations in firms' aggregate asset volatility are key for the transmission channel that links the fundamental drivers of financial indicators to the real economy.

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