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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

Suggested Citation

  • Berg, Tobias, 2010. "The term structure of risk premia: new evidence from the financial crisis," Working Paper Series 1165, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20101165
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1165.pdf
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    Cited by:

    1. Michele Leonardo Bianchi, 2012. "An empirical comparison of alternative credit default swap pricing models," Temi di discussione (Economic working papers) 882, Bank of Italy, Economic Research and International Relations Area.
    2. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    3. van Binsbergen, Jules & Hueskes, Wouter & Koijen, Ralph & Vrugt, Evert, 2013. "Equity yields," Journal of Financial Economics, 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.
    4. repec:zbw:bofrdp:2014_009 is not listed on IDEAS
    5. Simone Varotto, 2011. "Liquidity risk, credit risk, market risk and bank capital," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(2), pages 134-152, April.
    6. Olli-Matti Laine, 2023. "Monetary Policy and Stock Market Valuation," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 365-416, March.
    7. Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, New Economic School (NES).
    8. W. Heynderickx & J. Cariboni & W. Schoutens & B. Smits, 2016. "The relationship between risk-neutral and actual default probabilities: the credit risk premium," Applied Economics, Taylor & Francis Journals, vol. 48(42), pages 4066-4081, September.
    9. Tölö, Eero & Jokivuolle, Esa & Virén, 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.
    10. Tölö, Eero & Jokivuolle, Esa & Virén, Matti, 2017. "Do banks’ overnight borrowing rates lead their CDS price? Evidence from the Eurosystem," Journal of Financial Intermediation, Elsevier, vol. 31(C), pages 93-106.
    11. Stefanescu, Razvan & Dumitriu, Ramona, 2015. "Alegerea soluţiilor pentru expunerile faţă de risc [Choosing solutions to risk exposures]," MPRA Paper 65074, University Library of Munich, Germany.
    12. Tölö, Eero & Jokivuolle, Esa & Virén, Matti, 2014. "Do private signals of a bank s creditworthiness predict the bank s CDS price? Evidence from the Eurosystem's overnight loan rates," Bank of Finland Research Discussion Papers 9/2014, Bank of Finland.
    13. P. Lopez, 2014. "The Term Structure of the Welfare Cost of Uncertainty," Working papers 521, Banque de France.

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    More about this item

    Keywords

    credit risk; Equity premium; mean reversion; risk premia; structural models of default;
    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

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