This article investigates the impact of changes in risk perception on bond markets triggered by the 2007–08 financial crisis. Using a methodology novel to empirical finance, we quantify the increase in credit spreads caused by changes in risk pricing and changes in risk factors. The lasting increase in credit spreads is almost exclusively due to time-varying prices of risk. We interpret this as a change in risk perception which provides a possible solution to the credit spread puzzle. Default premia spiked during the crisis and did not return to their pre-crisis levels. Liquidity premia increased during and after the crisis.

Anecdotal and indirect empirical evidence suggest that excitement and market bubbles are intertwined, such that excitement not only arises during bubbles but may also help fuel them. We directly test the impact of excitement on bubbles in a bubble-prone experimental asset-pricing market ( Capinalp, Porter, and Smith, 2001 ). Prior to trading, participants are assigned to emotion inductions through video clips The results of fifty-five markets show larger asset pricing bubbles in magnitude and amplitude in the excitement treatment relative to a treatment of same valence and lower intensity ( calm ) and a treatment of similar intensity and opposite valence ( fear ).