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A quantitative analysis of risk premia in the corporate bond market

Sara Cecchetti ()
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Sara Cecchetti: Bank of Italy

No 1141, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We propose an econometric model to decompose corporate bond spreads into compensation required by investors for unpredictable future changes in the credit environment and for expected default losses. We use the model to understand whether the significant reduction in corporate bond spreads observed since the launch of the CSPP (Corporate Sector Purchase Programme) is attributable more to the fact that expansionary monetary policy measures tend to increase the risk appetite of investors and compress risk premia, or to the ability of unconventional measures to reduce expected default losses by improving investors’ expectations about the economic and financial conditions of issuers.

Keywords: bond excess return; credit default swap; distress risk premium; expected default frequancy; jump-at-default risk premium (search for similar items in EconPapers)
JEL-codes: B26 C02 F30 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-rmg
Date: 2017-10
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