The term structure of risk premia: new evidence from the financial crisis

Tobias Berg

No 1165, Working Paper Series from European Central Bank

Abstract: This study calibrates the term structure of risk premia before and during the 2007/2008 financial crisis using a new calibration approach based on credit default swaps. The risk premium term structure was flat before the crisis and downward sloping during the crisis. The instantaneous risk premium increased significantly during the crisis, whereas the long-run mean of the risk premium process was of the same magnitude before and during the crisis. These findings suggest that (marginal) investors have become more risk averse during the crisis. Investors were, however, well aware that risk premia will revert back to normal levels in the long run. JEL Classification: G12, G13

Keywords: credit risk; Equity premium; mean reversion; risk premia; structural models of default (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-cfn, nep-rmg and nep-upt
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101165

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