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On bounding credit event risk premia

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Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a ?contagious? response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk premia are minuscule.

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  • Jennie Bai & Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, 2012. "On bounding credit event risk premia," Staff Reports 577, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:577
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    Cited by:

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    2. Gouriéroux, C. & Monfort, A. & Renne, J.P., 2014. "Pricing default events: Surprise, exogeneity and contagion," Journal of Econometrics, Elsevier, vol. 182(2), pages 397-411.
    3. Jian Luo & Xiaoxia Ye & May Hu, 2016. "Counter-Credit-Risk Yield Spreads: A Puzzle in China's Corporate Bond Market," International Review of Finance, International Review of Finance Ltd., vol. 16(2), pages 203-241, June.

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    Keywords

    Default (Finance); Credit; Risk; Financial crises;
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