Risk Aversion in Corporate Bond Markets

51 Pages Posted: 11 Oct 2021 Last revised: 22 Nov 2021

See all articles by Antje Berndt

Antje Berndt

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

Ilya Dergunov

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

Jean Helwege

UC Riverside

Date Written: November 18, 2021

Abstract

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

Berndt, Antje and Dergunov, Ilya and Helwege, Jean, Risk Aversion in Corporate Bond Markets (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3939949 or http://dx.doi.org/10.2139/ssrn.3939949

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

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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