Risk Aversion in Corporate Bond Markets
51 Pages Posted: 11 Oct 2021 Last revised: 22 Nov 2021
Date Written: November 18, 2021
We examine the time variation of risk aversion in corporate bond markets and its relation- ship with monetary policy, using data from 1973 to 2020. Our approach extracts the portion of corporate credit spreads due to changing risk aversion with a new methodology that relies on the fact that credit spreads reflect the probability of default, default betas, macroeconomic uncertainty and risk aversion elasticity. We identify substantial temporal variation in measured risk aversion elasticity, and show that it tends to be higher when monetary policy is tighter. We document that contrary to popular belief, the prolonged post-GFC period of ultra-low interest rates did not result in excessive “Reaching for Yield” behavior.
Keywords: Default risk, default risk premia, default beta, reaching for yield
JEL Classification: G12, G13, G22, G24
Suggested Citation: Suggested Citation