Working Paper: NBER ID: w24213
Authors: Antje Berndt; Rohan Douglas; Darrell Duffie; Mark Ferguson
Abstract: We measure credit risk premia - prices for bearing corporate default risk in excess of expected default losses - using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit risk premia fluctuate over time by more than a factor of ten. Credit risk premia comove with macroeconomic indicators, even after controlling for variation in expected default losses, with higher premia per unit of expected loss during times of market-wide distress. Countercyclical variation of premia-to-expected-loss ratios is more pronounced for investment-grade issuers than for high-yield issuers.
Keywords: credit risk premia; corporate default risk; credit default swaps; expected default losses; macroeconomic indicators
JEL Codes: G12; G13; G22; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected loss rate (G33) | CDS rate (E43) |
| macroeconomic instability (E60) | credit risk premia (G12) |
| credit quality (L15) | credit risk premia (G12) |
| credit risk (G21) | market conditions (P42) |
| credit risk premia (G12) | expected losses (G33) |