NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Alexandre Jeanneret

HEC Montreal
3000, ch de la Cote-Ste-Catherine
Montreal H3T 2A7
Canada

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: HEC Montreal

NBER Working Papers and Publications

November 2018Low Inflation: High Default Risk AND High Equity Valuations
with Harjoat S. Bhamra, Christian Dorion, Michael Weber: w25317
We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.
 
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