We model the impact of supply and demand on risk premiums in electricity futures, using daily data for 2003–2014. The model provides a satisfactory fit and allows for unspanned economic risk not embedded in futures prices. Model-implied spot risk premiums and forward biases are large, negative, highly time-varying, and exhibit plausible seasonal patterns. They differ from existing models, especially in periods of market turmoil, have not decreased in size over time, and help predict future returns. Both demand and supply have an economically significant impact on risk premiums. The risk premium associated with supply is characterized by large positive outliers.

There have been 128 defaults among U.S. CDS reference entities between 2001 and 2020. Within this sample, the five-year CDS spread is a significant predictor of corporate default in models with equity market covariates and firm attributes. This finding holds for forecast horizons up to 12 months, among financial and non-financial firms, within and without the great financial crisis, and is robust to the inclusion of corporate bond and equity options market information. A decomposition of the CDS spread into liquidity, physical default, and risk premium components shows that most of its predictive power for corporate default comes from the physical default component, both in- and out-of-sample. These results confirm the relevance of information contained in single-name CDS pricing to corporate default prediction.

This paper evaluates the short-run economic and financial implications of tightening the environmental regulations. We build an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model that combines green policies aiming to reduce firms’ emission together with financial frictions and endogenous default. The simulation results show that tightening environmental policies dampens the positive impact of expansionary shocks, compromises the firms’ ability to repay loans, and consequently poses risks to the financial stability. For the empirical analysis, we examine the effect of environmental regulations tightened by the Chinese 11th Five-Year Plan on manufacturing firms’ productivity and its implications for the financial sector. Using the difference-in-difference approach, we find that the manufacturing firms’ productivity deteriorated due to the enhanced environmental regulation stringency, making the profitability and total output decline accordingly. As a result, firms located in the cities with higher emission reduction targets were more likely to default, threatening the financial stability.

Does government debt impede firm innovation? We address this question by examining the effects of the debt accumulated by local government financing vehicles (LGFVs) across Chinese prefectures between 2006 and 2012 on industrial firms’ R&D spending and patents. We find that government debt reduces firms’ R&D expenditures and lowers firms’ number of new patents. One plausible explanation is that government debt raises firms’ capital costs, which limits innovation activities. Consistently, we find that the innovations of firms that are more likely to be financially constrained – small firms and firms with low cash flow – are more affected by the expansion of government debt. Our results imply that although government deficit spending may stimulate the economy in the short run, it could have negative repercussions for economic productivity in the longer run.