Excerpt
Excerpt
A Model of Credit Market Sentiment. Robin Greenwood, Samuel Hanson, March 24, 2016, Paper. "We present a model of credit market sentiment in which investors form beliefs about future creditworthiness by extrapolating past defaults. Our key contribution is to model the endogenous two-way feedback between credit market sentiment and credit market outcomes. This feedback arises because investors’ beliefs depend on past defaults, but beliefs also drive future defaults through investors’ willingness to refinance debt. Our model is able to capture many documented features of credit booms and busts, including the link between credit growth and future returns, and the “calm before the storm” periods in which fundamentals have deteriorated but the credit market has not yet turned." Link