Credit Risk Premiums of European Companies

Abstract

This paper examines credit risk premiums of 131 European companies as the difference between their CDS spreads and expected losses. The period between September 2012 and December 2021 is considered, i.e. when the interest rate level was at the zero lower bound. We find a positive relationship between these risk premiums and various operationalisations of the risk-free interest rate. In addition, we address the risk appetite as a component of credit risk premiums. Our results indicate that the risk appetite in Eurozone countries relative to European non-euro countries increased in each period following the ECB’s announcements of the public sector purchase programme and the corporate sector purchase programme. Therefore, the results suggest a search for yield behaviour in Eurozone countries. In contrast, the effects are ambiguous in the period following the ECB’s announcement of the pandemic emergency purchase programme.

Keywords: Credit default swap, credit risk premium, risk appetite, risk-free interest rate, unconventional monetary policy

JEL Classification: E44, E52, G12, G14