Decomposing the Returns on European Debt

Antje Berndt and Iulian Obreja

No 2008-E12, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: Common variation in the prices of European corporate debt may not always be associated with a rational response to an increase in the relative importance of a macroeconomic risk factor. Building on Campbell’s ICAPM framework, we show that risk premia of assets with nonlognormal return distributions represent compensation not only for exposure to macroeconomic factors but also for unexpected revisions to these assets’ return distributions, such as sudden increases in the likelihood of extreme events. If such revisions happen across assets almost simultaneously, perhaps as a systemic response to a large credit event, they can induce covariation in risk premia unrelated to the time variation of the priced macroeconomic factors. Our study presents evidence from the European debt markets which supports this theory. The asset pricing tests also document patterns consistent with the “flight to quality” effect for European corporate bonds.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://student-3k.tepper.cmu.edu/gsiadoc/wp/2008-E12.pdf
Our link check indicates that this URL is bad, the error code is: 401 Unauthorized

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cmu:gsiawp:1205771884

Ordering information: This working paper can be ordered from
https://student-3k.t ... /gsiadoc/GSIA_WP.asp

Access Statistics for this paper

More papers in GSIA Working Papers from Carnegie Mellon University, Tepper School of Business Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890.
Bibliographic data for series maintained by Steve Spear ().