On Bounding Credit-Event Risk Premia

AFA

48 Pages Posted: 13 Nov 2012 Last revised: 23 Jul 2018

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Jean Helwege

UC Riverside

Date Written: February 28, 2015

Abstract

Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit-event risk typically preclude the most plausible economic justification for such risk to be priced, namely, a contemporaneous drop in the market portfolio. When this "contagion" channel is introduced within a general equilibrium framework for an economy comprising a large number of firms, credit-event risk premia have an upper bound of a few basis points, and are dwarfed by the contagion premium. We provide empirical evidence that indicates credit-event risk premia are less than 1 bp but contagion risk premia are significant.

Keywords: credit risk model, contagion

JEL Classification: G12, G13

Suggested Citation

Bai, Jennie and Collin-Dufresne, Pierre and Goldstein, Robert S. and Helwege, Jean, On Bounding Credit-Event Risk Premia (February 28, 2015). AFA. Available at SSRN: https://ssrn.com/abstract=2175108 or http://dx.doi.org/10.2139/ssrn.2175108

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jean Helwege

UC Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
9518274284 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
285
rank
100,252
Abstract Views
1,498
PlumX Metrics