Review of Financial Studies Vol. 35 No. 10 2022

The Market Risk Premium for Unsecured Consumer Credit Risk

Matthias Fleckenstein¹; Francis A. Longstaff²

¹ Lerner College of Business and Economics, University of Delaware , USA · ² UCLA Anderson School of Management, University of California at Los Angeles and the National Bureau of Economic Research (NBER) , USA

Abstract

We use the prices of credit card asset-backed securities to study the market risk premium associated with unsecured consumer credit risk. We find that the market incorporates a substantial credit risk premium into the prices of these securities. Furthermore, there has been a major repricing of unsecured consumer credit risk since the 2007–2009 financial crisis. We find evidence that this increase is linked to balance-sheet costs imposed by postcrisis changes in regulations that have placed credit card securitizations back onto issuer balance sheets. These regulatory changes may have added more than 100 basis points to the cost of unsecured household credit.

DOI

10.1093/rfs/hhac002

Volume

35

Issue

10

Pages

4756-4801

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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