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

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Thomas Gehrig

University of Vienna

Philipp B. Rindler

EBS Universität für Wirtschaft und Recht - EBS Business School

Multiple version iconThere are 3 versions of this paper

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

Füss, Roland and Gehrig, Thomas and Rindler, Philipp B., Changing Risk Perception and the Time-Varying Price of Risk (July 25, 2015). Review of Finance, Vol. 20, No. 4, 2016., Available at SSRN: https://ssrn.com/abstract=1780204 or http://dx.doi.org/10.2139/ssrn.1780204

Roland Füss

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Thomas Gehrig

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Philipp B. Rindler (Contact Author)

EBS Universität für Wirtschaft und Recht - EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

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