Estimating Equity Premia from CDS Spreads

30 Pages Posted: 16 Oct 2007 Last revised: 22 Jun 2016

See all articles by Christoph Kaserer

Christoph Kaserer

Technische Universität München (TUM)

Tobias Berg

Goethe University Frankfurt

Date Written: November 2008


We propose a new approach to estimate the equity premium using CDS spreads and structural models of default. Our estimates yield equity premia of 6.50% for the U.S., 5.44% for Europe and 6.21% for Asia based on 5-year CDS spreads from 2003-2007. Due to some conservative assumptions these estimates are upper limits for the equity premium. Using 3-, 7- and 10-year CDS maturities yields similar results and offers an opportunity to estimate the term structure of risk premia. Although our estimator is developed in a Merton framework it is robust with respect to model changes. In fact, we obtain similar results when extending the approach to a first-passage-time framework, strategic default frameworks or a framework with unobservable asset values (Duffie/Lando (2001)).

Keywords: credit risk premim, equity premium, market sharpe ratio, credit risk, structural models of default

JEL Classification: G13, G31

Suggested Citation

Kaserer, Christoph and Berg, Tobias, Estimating Equity Premia from CDS Spreads (November 2008). EFA 2009 Bergen Meetings Paper, Available at SSRN: or

Christoph Kaserer (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)


Tobias Berg

Goethe University Frankfurt ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323

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