Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    A Model of Credit Market Sentiment
    08 Sep 2016Working Paper Summaries

    A Model of Credit Market Sentiment

    by Robin Greenwood, Samuel G. Hanson, and Lawrence J. Jin
    Recent empirical research in finance and economics has revived the idea that investor sentiment drives credit booms and busts. To explore the drivers of sentiment in credit markets, the authors model the two-way feedback between credit market sentiment and credit market outcomes. In their model the propagation of credit cycles is driven by the interplay between expectations and the refinancing nature of credit markets.
    LinkedIn
    Email

    Author Abstract

    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 at low interest rates. 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: August 2016
    • HBS Working Paper Number: HBS Working Paper #17-014
    • Faculty Unit(s): Finance
      Trending
        • 27 Jan 2023
        • Op-Ed

        Have We Lost Sight of Integrity?

        • 01 Feb 2023
        • What Do You Think?

        Will Hybrid Work Strategies Pull Down Long-Term Performance?

        • 31 Jan 2023
        • Research & Ideas

        It’s Not All About Pay: College Grads Want Jobs That ‘Change the World’

        • 17 Jan 2023
        • In Practice

        8 Trends to Watch in 2023

        • 28 Feb 2018
        • Sharpening Your Skills

        Master the Team Meeting

    Laura Alfaro
    Laura Alfaro
    Warren Alpert Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Robin Greenwood
    Robin Greenwood
    George Gund Professor of Finance and Banking
    Anne and James F. Rothenberg Faculty Fellow
    Senior Associate Dean for Faculty Development and Research
    Contact
    Send an email
    → More Articles
    Samuel G. Hanson
    Samuel G. Hanson
    William L. White Professor of Business Administration
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Credit
    • Financial Markets
    • Market Timing
    • Business Cycles
    • Financial Services

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College