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A quantitative analysis of risk premia in the corporate bond market

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  • Sara Cecchetti

    (Bank of Italy)

Abstract

We propose an econometric model to decompose corporate bond spreads into compensation required by investors for unpredictable future changes in the credit environment and for expected default losses. We use the model to understand whether the significant reduction in corporate bond spreads observed since the launch of the CSPP (Corporate Sector Purchase Programme) is attributable more to the fact that expansionary monetary policy measures tend to increase the risk appetite of investors and compress risk premia, or to the ability of unconventional measures to reduce expected default losses by improving investors’ expectations about the economic and financial conditions of issuers.

Suggested Citation

  • Sara Cecchetti, 2017. "A quantitative analysis of risk premia in the corporate bond market," Temi di discussione (Economic working papers) 1141, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1141_17
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1141/en_tema_1141.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Joost Bats, 2020. "Corporates dependence on banks: The impact of ECB corporate sector purchases," Working Papers 667, DNB.
    2. Betz, Frank & De Santis, Roberto A., 2019. "ECB corporate QE and the loan supply to bank-dependent firms," Working Paper Series 2314, European Central Bank.
    3. Fan Li & Andrea Mercatanti & Taneli Mäkinen & Andrea Silvestrini, 2019. "A regression discontinuity design for categorical ordered running variables with an application to central bank purchases of corporate bonds," Temi di discussione (Economic working papers) 1213, Bank of Italy, Economic Research and International Relations Area.
    4. Stefano Neri & Stefano Siviero, 2019. "The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks," Questioni di Economia e Finanza (Occasional Papers) 486, Bank of Italy, Economic Research and International Relations Area.
    5. Sara Cecchetti, 2020. "An analysis of sovereign credit risk premia in the euro area: are they explained by local or global factors?," Temi di discussione (Economic working papers) 1271, Bank of Italy, Economic Research and International Relations Area.
    6. Frank Betz & Roberto A. De Santis, 2022. "ECB Corporate QE and the Loan Supply to Bank-Dependent Firms," International Journal of Central Banking, International Journal of Central Banking, vol. 18(2), pages 107-148, June.

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    More about this item

    Keywords

    bond excess return; credit default swap; distress risk premium; expected default frequancy; jump-at-default risk premium;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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