The Financial Premium

53 Pages Posted: 27 Dec 2022 Last revised: 1 Feb 2024

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 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 maturity, and we denote this difference the financial premium. During the period 1987–2020 the premium was on average 43bps in the U.S. and higher for lower ratings and in financial crises. The premium is increasing in bond beta, measures of systemic risk, and predicts economic activity. We derive a model that explains our findings: banks hold a diversified portfolio of corporate debt and bank bonds therefore reflect more systematic risk than the individual corporate bonds.

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 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 - Department of Finance ( email )

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

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