Risk Aversion in Corporate Bond Markets
58 Pages Posted: 11 Oct 2021 Last revised: 12 May 2022
Date Written: May 12, 2022
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: Suggested Citation