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The Credit Risk Premium

50 Pages Posted: 14 Feb 2015 Last revised: 5 Aug 2016

Attakrit Asvanunt

AQR Capital Management, LLC

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Date Written: June 21, 2016

Abstract

Despite theoretical and intuitive reasons for a credit risk premium, past research has found little supporting empirical evidence. This is primarily due to biases in computing credit excess returns which improperly account for term risk. Using data spanning 80 years in the U.S., and nearly 20 years in Europe, we find strong evidence of credit risk premium after correctly adjusting for term risk. The credit risk premium is not spanned by other known risk premia and exhibits time variation related to economic growth and aggregate default rates. These results have important implications for asset pricing and investment decisions.

Keywords: risk premium, credit risk, asset allocation

JEL Classification: G11, G12

Suggested Citation

Asvanunt, Attakrit and Richardson, Scott A., The Credit Risk Premium (June 21, 2016). Available at SSRN: https://ssrn.com/abstract=2563482 or http://dx.doi.org/10.2139/ssrn.2563482

Attakrit Asvanunt

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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