Credit Surfaces and Economic Uncertainty

July 2026

Credit Surfaces and Economic Uncertainty

John Geanakoplos and David E. Rappoport

Abstract:

The Credit Surface along the leverage dimension gives the bond spread as a function of the loan-to-value ratio. Empirically, we show that uncertainty shocks typically increase spreads and steepen the credit surface, profoundly affecting the supply of credit. Theoretically, we derive necessary and sufficient conditions for the convexity of the credit surface, and for changes in the anticipated distribution of collateral prices that lead to steepening of the credit surface. Finally, we show that the credit surface itself fully reveals the entire distribution of collateral prices, thus providing a new and vivid language with which to describe uncertainty and stochastic orders. Credit surface steepening itself is a new stochastic order that may better capture our intuitive notion of more uncertainty.

Keywords: Credit surfaces, economic uncertainty, bond pricing, credit spreads, Black- Scholes-Merton model, leverage.

DOI: https://doi.org/10.17016/FEDS.2026.052

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