The Financial Premium

45 Pages Posted: 27 Dec 2022

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

Date Written: December 23, 2022

Abstract

We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and we denote this difference the financial premium. During the period 1987-2020 the premium was on average 43bps in the U.S. corresponding to a 31% higher spread and the premium is higher for lower ratings and in financial crises. Furthermore, the premium relates to measures of systemic risk and predicts economic activity. We derive a model that explains the empirical results: banks hold a diversified portfolio of corporate bonds (loans) and bank bonds therefore reflect more systematic risk than the individual corporate bonds.

Keywords: Credit Spreads, Risk Premia, Financial institutions, Systemic risk

JEL Classification: C23; G12

Suggested Citation

Dick-Nielsen, Jens and Feldhütter, Peter and Lando, David, The Financial Premium (December 23, 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 ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3600 (Fax)

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