Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of New York
Staff Reports
On bounding credit event risk premia
Jennie Bai
Pierre Collin-Dufresne
Robert S. Goldstein
Jean Helwege
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.


Download Full text
Download Full text
Cite this item
Jennie Bai & Pierre Collin-Dufresne & Robert S. Goldstein & Jean Helwege, On bounding credit event risk premia, Federal Reserve Bank of New York, Staff Reports 577, 2012.
More from this series
JEL Classification:
Subject headings:
Keywords: Default (Finance) ; Credit ; Risk ; Financial crises
For corrections, contact Amy Farber ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal