Working Paper: CEPR ID: DP8714
Authors: Roland Füss; Thomas Gehrig; Philipp B. Rindler
Abstract: The paper investigates whether the financial crisis did affect risk perceptions, and, hence, change structural parameters. By decomposing credit spreads of US corporate bonds into the contributions by credit, equity, and liquidity risk factors as well as structural change, the relative contribution of the change in risk perceptions can be measured. We show that this increase is mostly due to aversion to default risk for high-yield bonds. For low-yield bonds, the increase is mostly due to liquidity related factors. By means of counterfactual analysis we find that the financial crisis shifted the distribution of bond spreads almost uniformly. This evidence is consistent with changing risk perceptions as predicted by theories of ambiguity aversion or social learning in the case of rare events.
Keywords: ambiguity aversion; counterfactual analysis; credit spreads; quantile regression; structural models
JEL Codes: C21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in risk perceptions (D81) | Increase in credit spreads (G19) |
| Changes in underlying risk factors (I12) | Increase in credit spreads (G19) |
| Effects of risk factors (I12) | Credit spreads after the crisis (G19) |
| Increases in fundamental pricing coefficients (L11) | Elevated credit spreads (G19) |
| Financial crisis (G01) | Increase in perceived default risk for high-yield bonds (G33) |
| Financial crisis (G01) | Increase in credit spreads for high-yield bonds (G19) |
| Liquidity perceptions (E41) | Increase in credit spreads for low-yield bonds (E43) |
| Financial crisis (G01) | Structural change in pricing of risk (G19) |
| Financial crisis (G01) | Permanent alteration in risk-bearing capacity of bond market (E43) |