A quantitative analysis of risk premia in the corporate bond market

Keywords: bond excess return, credit default swap, distress risk premium, expected default frequency, jump-at-default risk premium.
  • 15 Noviembre 2017

Sara Cecchetti.

Banco de Italia, Working Paper, Number 1141 - October 2017.

Abstract:

We propose an econometric model to decompose corporate bond spreads into compensation required by investors for unpredictable future changes in the credit environment and for expected default losses. We use the model to understand whether the significant reduction in corporate bond spreads observed since the launch of the CSPP (Corporate Sector Purchase Programme) is attributable more to the fact that expansionary monetary policy measures tend to increase the risk appetite of investors and compress risk premia, or to the ability of unconventional measures to reduce expected default losses by improving investors’ expectations about the economic and financial conditions of issuers.