The Term Structure of Risk Premia: Evidence from CDS Spreads
43 Pages Posted: 22 May 2009 Last revised: 7 Jan 2013
Date Written: January 7, 2013
This study estimates the term structure of risk premia before and during the 2007/2008 financial crisis using a new approach based on credit default swaps. Credit markets offer the unique possibility to estimate risk premia for distinct maturities, which considerably facilitates the estimation of the term structure of risk premia. Wefind that the risk premium term structure was fllat before the crisis and downward sloping during the crisis. We provide several robustness tests to show that our results are not driven by counterparty risk, a biased measurement of the real-world default probability, or liquidity.
Keywords: time-varying risk premia, return predictability, credit risk, equity premium, structural models of default
JEL Classification: G12, G13
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