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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: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1165.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Simone Varotto, 2011. "Liquidity Risk, Credit Risk, Market Risk and Bank Capital," ICMA Centre Discussion Papers in Finance icma-dp2011-02, Henley Business School, Reading University.
    4. P. Lopez, 2014. "The Term Structure of the Welfare Cost of Uncertainty," Working papers 521, Banque de France.
    5. Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, Center for Economic and Financial Research (CEFIR).
    6. 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.
    7. Mark Joy & Marek Rusnák & Kateřina Šmídková & Bořek Vašíček, 2017. "Banking and Currency Crises: Differential Diagnostics for Developed Countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(1), pages 44-67, January.
    8. repec:eee:jfinin:v:31:y:2017:i:c:p:93-106 is not listed on IDEAS
    9. Simone Varotto, 2011. "Liquidity risk, credit risk, market risk and bank capital," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(2), pages 134-152, April.

    More about this item

    Keywords

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

    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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