← Search

On Bounding Credit-Event Risk Premia

Jennie Bai1; Pierre Collin-Dufresne; Robert S. Goldstein2; Jean Helwege3

1 Georgetown University · 2 University of Minnesota · 3 University of California, Riverside

Review of Financial Studies 2015 open access

Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit-event risk typically preclude the most plausible economic justification for such risk to be priced, namely, a contemporaneous drop in the market portfolio. When this “contagion” channel is introduced within a general equilibrium framework for an economy comprising a large number of firms, credit-event risk premia have an upper bound of a few basis points, and are dwarfed by the contagion premium. We provide empirical evidence that indicates credit-event risk premia are less than 1 bp, but contagion risk premia are significant.

DOI
10.1093/rfs/hhv022
Volume
28 (9)
Pages
2608-2642
Language
en
Export
BibTeX
Sources
openalex crossref