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Time-varying term structure of risk premium, estimated with credit default swaps

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  • Kostyuk Victoria

    (Financial University)

Abstract

The paper estimates the time-variation and term structure of forward-looking equity premium of Australia, Asia excluding Japan, and CEEMEA region. Methodology is based on Berg and Kaserer (2009) approach which employs structural models of default within Merton framework (1974) to convert credit spread fromCDS into equity premium. The paper extends the Berg and Kaserer (2009) approach for equity risk premium (ERP) estimation in the following ways. Firstly, the forward-looking equity premium is calculated for developing markets, which to our best knowledge has not been done in the literature yet. Second, the use of monthly data allows observing time variation of equity premium. Finally, the availability of CDS data for 5-, and 10-year CDS maturities provides the term structure of equity premium for CEEMEA region since 2010. Term structure is downward sloping which implies that short-term risks are priced higher than long-term, and the slope becomes more angled during financial turmoil. Historical equity premium dynamics demonstrate apparent relationship with stock market behavior.

Suggested Citation

  • Kostyuk Victoria, 2014. "Time-varying term structure of risk premium, estimated with credit default swaps," Review of Business and Economics Studies, CyberLeninka;Федеральное государственное образовательное бюджетное учреждение высшего профессионального образования «Финансовый университет при Правительстве Российской Федерации» (Финансовый университет), issue 1, pages 21-38.
    • Handle: RePEc:scn:031730:15688962
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