On bounding credit event risk premia

Jennie Bai (), Pierre Collin-Dufresne, Robert S. Goldstein () and Jean Helwege
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Robert S. Goldstein: https://carlsonschool.umn.edu/faculty/robert-goldstein

No 577, Staff Reports from Federal Reserve Bank of New York

Abstract: Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced--namely, a ?contagious? response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk premia are minuscule.

Keywords: Default (Finance); Credit; Risk; Financial crises (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (3)

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