Credit Risk Premia and Intermediaries Leverage

61 Pages Posted: 22 Dec 2021

See all articles by Amir Khalilzadeh

Amir Khalilzadeh

École Polytechnique Fédérale de Lausanne

Date Written: May 20, 2018


We study credit risk premia of large international banks. Credit risk premium is defined as the credit spread net of an estimate of default risk. Our findings are threefold: (1) we show that credit risk premium accounts for two-thirds of the total price of default risk since the financial crisis, (2) this premium had been negative until just before the financial crisis but then rose dramatically and remained rather high until just recently, and (3) we document that risk-bearing capacity of the bank drives the risk premium in the credit market. That is, investors in the credit market require a premium for bearing risk due to the leverage growth of the bank. These findings are consistent with the theories that relate the risk premia to the health of the financial sector. Furthermore, potential risk factors related to the bank, default swap market, macroeconomic condition, and regulatory environment cannot eliminate the premium earned by the leverage.

Keywords: Credit Spreads, Credit Risk Premia, Leverage, Intermediaries Risk Bearing Capacity

JEL Classification: C32, G01, G21, G28, G32

Suggested Citation

Khalilzadeh, Amir, Credit Risk Premia and Intermediaries Leverage (May 20, 2018). Available at SSRN: or

Amir Khalilzadeh (Contact Author)

École Polytechnique Fédérale de Lausanne ( email )

EPFL Innovation Park
Extension School
CH-1015 Lausanne, Vaud

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