The magnitude and Cyclical Behavior of Financial Market Frictions



Figure 6

Firm-Level Leverage, Credit Spreads, and Default Probabilities

Leverage and Credit Spreads

Percentage Points

•a

30

25

20

15

10

5

0

0.03

0.10

0.33

1.00

5.00

Leverage at t (logarithmic scale)


Leverage and Expected Probabilities of Default


Annualized Tax-Adjusted Credit Spread at t+1                        Expected Year-Ahead Default Frequency at t


20




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