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Corporate Credit Risk Premia
[Fallen angels and price pressure]

Author

Listed:
  • Antje Berndt
  • Rohan Douglas
  • Darrell Duffie
  • Mark Ferguson

Abstract

We measure credit risk premia—prices for bearing corporate default risk in excess of expected default losses—using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008–09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit risk premia fluctuate over time by more than a factor of 10. Credit risk premia comove with macroeconomic indicators, even after controlling for variation in expected default losses, with higher premia per unit of expected loss during times of market-wide distress. Countercyclical variation of premia-to-expected-loss ratios is more pronounced for investment-grade issuers than for high-yield issuers.

Suggested Citation

  • Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, 2018. "Corporate Credit Risk Premia [Fallen angels and price pressure]," Review of Finance, European Finance Association, vol. 22(2), pages 419-454.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:2:p:419-454.
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    File URL: http://hdl.handle.net/10.1093/rof/rfy002
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    Cited by:

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    3. Antti J. Harju, 2023. "A Rank Estimator Approach to Modeling Default Frequencies," JRFM, MDPI, vol. 16(10), pages 1-17, October.
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    More about this item

    Keywords

    CDS; Credit risk premia; Credit ratings;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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