The Financial Premium

59 Pages Posted: 27 Dec 2022 Last revised: 24 Mar 2025

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Peter Feldhütter

Copenhagen Business School

David Lando

Copenhagen Business School - Department of Finance

Date Written: December 27, 2022

Abstract

We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and maturity, and we call this difference the financial premium. During the period 1987-2020 the premium is on average 43bps in the U.S., higher for lower ratings, higher in financial crises, and is increasing in bond beta.  We derive a model that explains the financial premium: banks hold diversified portfolios of non-financial debt and bank debt therefore reflect more systematic risk than non-financial debt.

Keywords: Credit spreads, risk premia, financial institutions, systematic risk, bond beta

JEL Classification: C23, G12

Suggested Citation

Dick-Nielsen, Jens and Feldhütter, Peter and Lando, David, The Financial Premium (December 27, 2022). Available at SSRN: https://ssrn.com/abstract=4310758 or http://dx.doi.org/10.2139/ssrn.4310758

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Peter Feldhütter (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

David Lando

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3, SOL/A4.17
Copenhagen, Frederiksberg 2000

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