regime switching model with a state-dependent cash flow process to capture macroeconomic risk in a firm's cash flow. Our … ratios, benefits to leverage, and costs of operating at a non-optimal leverage. If macroeconomic risk decreases, i … risk. The regime switching property of EBIT traces observed EBIT paths closely and is applicable to a wide range of …

downside risk. I solve the global numerical solution of the model using the method of policy function iteration. I find that (i … are almost default-free; (iii) counter-cyclical asset price volatility renders higher downside risk and pro …

particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ …

consumption, as might be expected in a non-Modigliani-Miller world. Different banks' behaviour after a shock has widely different … effects on the macroeconomic dynamics: passive leverage results to be shock absorbing and capable of neutralizing an initial … financial shock, whilst procyclical behaviour implies higher and more persistent instability and distributive effects than the …

This paper studies the long-run evolution of bank risk and its links to the macroeconomy. Using data for 17 advanced …