How Does Low for Long Impact Credit Risk Premia?

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See all articles by Antje Berndt

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Jean Helwege

UC Riverside

Date Written: August 17, 2018

Abstract

The Federal Reserve's experiments in monetary policy related to the Global Financial Crisis lasted longer than any previous easing cycle, giving rise to the question of how does a long-term, low-interest-rate environment a ect the pricing of credit risk. We decompose credit default swap (CDS) rates into expected losses and credit risk premia, and show that the level of and rms' exposure to systematic default risk, controls for mis-measuring expected losses and proxies for CDS market liquidity explain more than 80% of the variation in risk premia across rms and over time. We show that in the zero lower bound period, residual risk premia are lower for high-yield debt compared to investment-grade debt|consistent with a reaching for yield interpretation. Our findings are also consistent with investors demanding compensation for ambiguity aversion related to the end of the low-rate environment, a decrease in the supply of risk capital and higher costs of trading credit risky instruments due to regulatory changes.

Keywords: Credit Risk Premia, Systematic Default Risk, Reaching for Yield, Ambiguity Aversion, Unconventional Monetary Policy

JEL Classification: G12, G13, G22, G24

Suggested Citation

Berndt, Antje and Helwege, Jean, How Does Low for Long Impact Credit Risk Premia? (August 17, 2018). Available at SSRN: https://ssrn.com/abstract=

Antje Berndt (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, ACT 0200
Australia

HOME PAGE: http://www.cbe.anu.edu.au/about/staff-directory/?profile=Antje-Berndt

Jean Helwege

UC Riverside ( email )

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

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