Changing Risk Perception and the Time-Varying Price of Risk
Review of Finance, Vol. 20, No. 4, 2016.
38 Pages Posted: 10 Mar 2011 Last revised: 3 Dec 2016
There are 3 versions of this paper
Changing Risk Perception and the Time-Varying Price of Risk
Scattered Trust - Did the 2007-08 Financial Crisis Change Risk Perceptions?
Did the 2007-08 Financial Crisis Change Risk Perceptions?
Date Written: July 25, 2015
Abstract
This paper investigates the impact of changes in risk perception on bond markets triggered by the 2007-08 financial crisis. Using a methodology novel to empirical finance, we quantify the increase in credit spreads caused by changes in risk pricing and changes in risk factors. The lasting increase in credit spreads is almost exclusively due to time-varying prices of risk. We interpret this as a change in risk perception which provides a possible solution to the credit spread puzzle. Default premia spiked during the crisis and did not return to their pre-crisis levels. Liquidity premia increased during and after the crisis.
Keywords: Credit spreads, structural models, quantile regression, counterfactual analysis, ambiguity aversion
JEL Classification: C21, G12
Suggested Citation: Suggested Citation
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