Did the 2007-08 Financial Crisis Change Risk Perceptions?

Posted: 11 Jun 2012 Last revised: 10 Dec 2016

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF); Systemic Risk Centre - LSE

Philipp B. Rindler

EBS Universität für Wirtschaft und Recht - EBS Business School

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2013

Abstract

The paper investigates, whether the financial crisis did affect risk perceptions, and, hence, change structural parameters. By decomposing credit spreads of US corporate bonds into the contributions by credit, equity, and liquidity risk factors as well as structural change, the relative contribution of the change in risk perceptions can be measured. We show that this increase is mostly due to aversion to default risk for high-yield bonds. For low-yield bonds, the increase is mostly due to liquidity related factors. By means of counterfactual analysis we find that the financial crisis shifted the distribution of bond spreads almost uniformly. This evidence is consistent with changing risk perceptions as predicted by theories of ambiguity aversion or social learning in the case of rare events.

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., Did the 2007-08 Financial Crisis Change Risk Perceptions? (August 1, 2013). University of St.Gallen, School of Finance Research Paper No. 171, Available at SSRN: https://ssrn.com/abstract=2081558 or http://dx.doi.org/10.2139/ssrn.2081558

Roland Füss

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

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St.Gallen, CH-9000
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Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom
London

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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