Default Risk Premium and Asset Prices

44 Pages Posted: 30 May 2015 Last revised: 3 Apr 2020

See all articles by Raffaele Corvino

Raffaele Corvino

University of Torino & CERP

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa; Sir John Cass Business School - City, University of London

Date Written: March 31, 2020

Abstract

This paper quantifies the premium demanded by the investors for bearing the corporate default risk. We propose a novel approach that exploits the information in both credit default swap (CDS) spreads and stock prices, using the pricing restrictions provided by a structural model of credit risk. By pinning down the daily dynamics of the market value of debt, we deliver daily estimates of the full term structure of the default risk premium for worldwide non-financial firms. We show that the premium declines with the time horizon, with the lower premia paid at the longer debt maturity. Moreover, we show that the dynamics of the default risk premium may predict opposite dynamics of equity and CDS prices across firms.

Keywords: Structural Estimation, Kalman Filter, Default Risk, Distress Puzzle

JEL Classification: C4, G12, G32, G33

Suggested Citation

Corvino, Raffaele and Fusai, Gianluca, Default Risk Premium and Asset Prices (March 31, 2020). Available at SSRN: https://ssrn.com/abstract=2611984 or http://dx.doi.org/10.2139/ssrn.2611984

Raffaele Corvino (Contact Author)

University of Torino & CERP ( email )

Corso Unione Sovietica 218bis
Piazza Arbarello 8
Torino, 10134
Italy
+39 3465316931 (Phone)

HOME PAGE: http://raffaelecorvino.com

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa ( email )

Via Perrone, 18
Novara, 28100
Italy

HOME PAGE: http://https://upobook.uniupo.it/gianluca.fusai

Sir John Cass Business School - City, University of London ( email )

106 Bunhill Row
London, EC2Y 8HB
Great Britain

HOME PAGE: http:// www.cass.city.ac.uk/experts/G.Fusai

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