TY - JOUR
T1 - On bounding credit-event risk premia
AU - Bai, Jennie
AU - Collin-Dufresne, Pierre
AU - Goldstein, Robert S.
AU - Helwege, Jean
N1 - Publisher Copyright:
© The Author 2015. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.
Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.
PY - 2015/9
Y1 - 2015/9
N2 - 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.
AB - 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.
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U2 - 10.1093/rfs/hhv022
DO - 10.1093/rfs/hhv022
M3 - Review article
AN - SCOPUS:84937479698
SN - 0893-9454
VL - 28
SP - 2608
EP - 2642
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 9
ER -