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The term structure of risk premia: new evidence from the financial crisis

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  • Berg, Tobias

Abstract

This study calibrates the term structure of risk premia before and during the 2007/2008 financial crisis using a new calibration approach based on credit default swaps. The risk premium term structure was flat before the crisis and downward sloping during the crisis. The instantaneous risk premium increased significantly during the crisis, whereas the long-run mean of the risk premium process was of the same magnitude before and during the crisis. These findings suggest that (marginal) investors have become more risk averse during the crisis. Investors were, however, well aware that risk premia will revert back to normal levels in the long run. JEL Classification: G12, G13

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1165.

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Date of creation: Mar 2010
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Handle: RePEc:ecb:ecbwps:20101165

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Keywords: Credit risk; Equity premium; Mean reversion; risk premia; structural models of default;

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Cited by:
  1. Tölö , Eero & Jokivuolle, Esa & Viren, Matti, 2014. "Do private signals of a bank’s creditworthiness predict the bank’s CDS price? Evidence from the Eurosystem's overnight loan rates," Research Discussion Papers 9/2014, Bank of Finland.
  2. van Binsbergen, Jules & Hueskes, Wouter & Koijen, Ralph & Vrugt, Evert, 2013. "Equity yields," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(3), pages 503-519.
    • Jules H. van Binsbergen & Wouter Hueskes & Ralph Koijen & Evert B. Vrugt, 2011. "Equity Yields," NBER Working Papers 17416, National Bureau of Economic Research, Inc.
  3. Simone Varotto, 2011. "Liquidity risk, credit risk, market risk and bank capital," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 7(2), pages 134-152, April.
  4. Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, Center for Economic and Financial Research (CEFIR).

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