The Great Recession of 2008 offers a primary example of the important role that fluctuations in credit risk play in the aggregate economy. In this paper we explore this link with a tractable general equilibrium asset pricing model with heterogeneous firms. Our model produces realistic movements...

The degree to which stock markets can perform theirrole of allocating resources efficiently in the presence of moral hazard isinvestigated. First, an existing framework is extended in order to define stockmarket equilibrium in such a way that allows for a dispersed initial ownershipdistribution...