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Risk premium, macroeconomics shocks, and information technology: An empirical analysis

  • Pekka Mannonen
  • Elias Oikarinen

    (Department of Economics, University of Turku, School of Economics)

This study identifies empirically the impact of various macroeconomic factors on the default risk premium. Using monthly data for the period 1970-2010 for the U.S., our estimations indicate that the monetary policy aggregates, risk-free interest rate, term structure of interest rates, inflation, and the state of the business cycle influence the risk premium. The results also provide some evidence in support of the hypothesis that the development of information technology has had a decreasing impact on the risk premium. Expectedly, various financial crises have had substantial and long-lasting effects on the premium. The results suggest that the direct impact of subprime crisis and Lehman collapse on the risk premium was as large as 2.5 percent-points for a sustainable period. Foreign financial crises, in turn, have lowered the risk premium in the U.S. market suggesting flight-to-safety phenomenon.

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Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 84.

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Length: 28
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:tkk:dpaper:dp84
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  1. Patrick Traichal & Steve Johnson, 1999. "Forecastable default risk premia and innovations," Journal of Economics and Finance, Springer, vol. 23(3), pages 214-225, September.
  2. De Graeve Ferre, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Money Macro and Finance (MMF) Research Group Conference 2006 83, Money Macro and Finance Research Group.
  3. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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  8. Mark Thompson, 2007. "Are adjustments in the default risk premium asymmetric?," Applied Economics, Taylor & Francis Journals, vol. 39(21), pages 2693-2698.
  9. Ramchander, Sanjay & Simpson, Marc W. & Chaudhry, Mukesh K., 2005. "The influence of macroeconomic news on term and quality spreads," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(1), pages 84-102, February.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May.
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  13. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series 94-18, Board of Governors of the Federal Reserve System (U.S.).
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  17. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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