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Journals
Publication year
On Bounding Credit-Event Risk Premia
Resource type
Authors/contributors
- Bai, Jennie (Author)
- Collin-Dufresne, Pierre (Author)
- Goldstein, Robert S. (Author)
- Helwege, Jean (Author)
Title
On Bounding Credit-Event Risk Premia
Abstract
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.
Publication
Review of Financial Studies
Volume
28
Issue
9
Pages
2608-2642
Date
2015
Citation
Bai, J., Collin-Dufresne, P., Goldstein, R. S., & Helwege, J. (2015). On Bounding Credit-Event Risk Premia. Review of Financial Studies, 28, 2608–2642.
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