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research article

On Bounding Credit-Event Risk Premia

Bai, Jennie
•
Collin-Dufresne, Pierre  
•
Goldstein, Robert S.
Show more
2015
Review Of Financial Studies

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 contemporaneous drop in the market portfolio. When this "contagion" channel is introduced within a general equilibrium framework for an economy comprising a large number of firms, credit-event risk premia have an upper bound of a few basis points, and are dwarfed by the contagion premium. We provide empirical evidence that indicates credit-event risk premia are less than 1 bp, but contagion risk premia are significant.

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Type
research article
DOI
10.1093/rfs/hhv022
Web of Science ID

WOS:000363977800005

Author(s)
Bai, Jennie
Collin-Dufresne, Pierre  
Goldstein, Robert S.
Helwege, Jean
Date Issued

2015

Publisher

Oxford University Press

Published in
Review Of Financial Studies
Volume

28

Issue

9

Start page

2608

End page

2642

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-PCD  
Available on Infoscience
December 2, 2015
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/121261
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