Endogenous Uncertainty and Credit Crunches

Straub, Ludwig and Ulbricht, Robert (2015) Endogenous Uncertainty and Credit Crunches. TSE Working Paper, n. 15-604, Toulouse

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Official URL: http://tse-fr.eu/pub/29800

Abstract

We develop a theory of endogenous uncertainty where the ability of investors to learn about firm-level fundamentals declines during financial crises. At the same time, higher uncertainty reinforces financial distress, causing a persistent cycle of uncertainty, pessimistic expectations, and financial constraints. Through this channel, a temporary shortage of funds can develop into a long-lasting funding problem for firms. Financial crises are characterized by increased credit misallocation, volatile asset prices, high risk premia, an increased cross-sectional dispersion of returns, and high levels of disagreement among forecasters. A numerical example suggests that the proposed channel may significantly delay recovery from financial shocks.

Item Type: Monograph (Working Paper)
Language: English
Date: 1 October 2015
Place of Publication: Toulouse
Uncontrolled Keywords: Belief traps, credit crunches, dispersed information, endogenous uncertainty, internal persistence of financial shocks, resource misallocation
JEL codes: D83 - Search; Learning; Information and Knowledge; Communication; Belief
E32 - Business Fluctuations; Cycles
E44 - Financial Markets and the Macroeconomy
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 05 Nov 2015 15:10
Last Modified: 21 Mar 2018 13:33
OAI ID: oai:tse-fr.eu:29800
URI: http://publications.ut-capitole.fr/id/eprint/18587

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