The Term Structure of Risk Premia: New Evidence from the Financial Crisis

48 Pages Posted: 8 Apr 2010

See all articles by Tobias Berg

Tobias Berg

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 10, 2010

Abstract

This study calibrates the term structure of risk premia before and during the 2007/2008 financial crisis using a new calibration approach based on credit default swaps. The risk premium term structure was flat before the crisis and downward sloping during the crisis. The instantaneous risk premium increased significantly during the crisis, whereas the long-run mean of the risk premium process was of the same magnitude before and during the crisis. These findings suggest that (marginal) investors have become more risk averse during the crisis. Investors were, however, well aware that risk premia will revert back to normal levels in the long run.

Keywords: credit risk, risk premia, equity premium, mean reversion, structural models of default

JEL Classification: G12, G13

Suggested Citation

Berg, Tobias, The Term Structure of Risk Premia: New Evidence from the Financial Crisis (February 10, 2010). ECB Working Paper No. 1165. Available at SSRN: https://ssrn.com/abstract=1574186

Tobias Berg (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

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