Corporate Credit Risk Premia

50 Pages Posted: 29 Nov 2017 Last revised: 31 Dec 2017

See all articles by Antje Berndt

Antje Berndt

Australian National University, College of Business and Economics

Rohan Douglas

Cornell University

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Mark Ferguson

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: December 24, 2017

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: CDS, Credit risk premia, Credit ratings

JEL Classification: G12, G13, G22, G24

Suggested Citation

Berndt, Antje and Douglas, Rohan and Duffie, James Darrell and Ferguson, Mark, Corporate Credit Risk Premia (December 24, 2017). Stanford University Graduate School of Business Research Paper No. 17-71, Available at SSRN: https://ssrn.com/abstract=3077352 or http://dx.doi.org/10.2139/ssrn.3077352

Antje Berndt (Contact Author)

Australian National University, College of Business and Economics ( email )

Australian National University
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Canberra, ACT 2601
Australia

HOME PAGE: http://https://cbe.anu.edu.au/about/staff-directory/professor-antje-berndt

Rohan Douglas

Cornell University

Ithaca, NY 14853
United States

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Canada

Mark Ferguson

Independent

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