-spread default affects the banking system. We find that the interaction of credit, asset prices, and loan losses explains a complete …We link banking and asset prices in a simple monetary macroeconomic model. Our main innovation is to consider how wide … deteriorate, an asset price decline causes default among leveraged firms, and banks suffer loan losses. Their size determines …

falling asset prices affect the banking system through wide-spread borrower default, while deriving explicit solutions and …This paper links banking with asset prices in a monetary macroeconomic model. The main innovation is to consider how …-linear, and involves feedback from the banking system in the form of credit contraction. When borrowers repay, the effect ‘passes …

's option value, even after compensating a lender for expected default losses. This non-neutrality of debt arises from an … risks, and lowers the investment threshold. Compensating the lender for expected default losses reduces project …

reorganization or liquidation if the value of the firm falls below a certain threshold. In the event of default, however, many …

measurement. We have extended the standard Merton approach to estimate a new risk neutral distance to default metric, assuming a … more complex capital structure, adjusting for dividend payments, introducing randomness to the default point and allowing a … fractional recovery when default occurs. Then, using financial ratios, other accounting based measures and the risk neutral …