Risk Aversion in Corporate Bond Markets

58 Pages Posted: 11 Oct 2021 Last revised: 12 May 2022

See all articles by Antje Berndt

Antje Berndt

Australian National University, College of Business and Economics

Ilya Dergunov

Australian National University (ANU); Goethe University Frankfurt - Research Center SAFE

Jean Helwege

UC Riverside

Date Written: May 12, 2022

Abstract

We examine risk aversion in corporate bond markets, and its relationship with monetary policy. While policy measures tend to restore confidence, extremely accommodative policy may engender excessive risk-taking. We measure temporal variation in risk aversion over 1974-2020 with a new methodology that isolates the elasticity of risk aversion to macro shocks from other components of credit spreads. Our theoretical framework extends habit-based pricing models by incorporating potential bailouts of systemic firms through cohort effects. We find risk aversion rises with tight monetary policy, but, contrary to popular belief, no evidence of excessive "Reaching for Yield" in the ultra-low-for-long post-GFC period.

Keywords: Risk aversion, corporate bonds, monetary policy, reaching for yield, government interventions

JEL Classification: G12, G13, G22, G24

Suggested Citation

Berndt, Antje and Dergunov, Ilya and Helwege, Jean, Risk Aversion in Corporate Bond Markets (May 12, 2022). Available at SSRN: https://ssrn.com/abstract=3939949 or http://dx.doi.org/10.2139/ssrn.3939949

Antje Berndt (Contact Author)

Australian National University, College of Business and Economics ( email )

Australian National University
Bldg 26C
Canberra, ACT 2601
Australia

HOME PAGE: http://https://cbe.anu.edu.au/about/staff-directory/professor-antje-berndt

Ilya Dergunov

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Goethe University Frankfurt - Research Center SAFE

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Jean Helwege

UC Riverside ( email )

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

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