research article
On Bounding Credit-Event Risk Premia
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.
Type
research article
Web of Science ID
WOS:000363977800005
Author(s)
Date Issued
2015
Publisher
Published in
Volume
28
Issue
9
Start page
2608
End page
2642
Editorial or Peer reviewed
REVIEWED
Written at
EPFL
EPFL units
Available on Infoscience
December 2, 2015
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