The Credit Risk Premium: Should Investors Overweight Credit, When, and By How Much?

CFA Digest ◽  
2012 ◽  
Vol 42 (2) ◽  
pp. 84-86
Author(s):  
Claire Emory
Keyword(s):  
Credit Risk ◽  
Risk Premium

scholarly journals Option-Based Credit Spreads

2018 ◽  
Vol 108 (2) ◽  
pp. 454-488 ◽  
Author(s):  
Christopher L. Culp ◽  
Yoshio Nozawa ◽  
Pietro Veronesi
Keyword(s):  
Economic Growth ◽  
Credit Risk ◽  
Risk Premium ◽  
Bond Market ◽  
Credit Spreads ◽  
Put Options ◽  
No Arbitrage ◽  
Primary Determinant ◽  
Default Risks ◽  
Bond Spreads

We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo firm assets. Empirically, like corporate spreads, pseudo bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' overestimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads. (JEL E23, E32, E44, G13, G24, G32)

scholarly journals The impacts of financial crisis on sovereign credit risk analysis in Asia and Europe

2015 ◽  
Vol 02 (03) ◽  
pp. 1550026
Author(s):  
Min Zhang ◽  
Adam W. Kolkiewicz ◽  
Tony S. Wirjanto ◽  
Xindan Li
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Risk Premium ◽  
Global Financial Crisis ◽  
European Countries ◽  
Foreign Reserve ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
Credit Risk Analysis ◽  
Credit Event

In this paper, we investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2007–2008 global financial crisis. Our results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, our results also show that commonality is importantly associated with both local and global financial and economic variables. However, there are markedly different impacts of the sovereign of credit risk in Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre- and post-crisis periods. Then the resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components appear to weight more than risk-premiums.

scholarly journals The Influence of Credit Interest Rate and Credit Risk on Market Performance

2020 ◽  
pp. 50-57
Author(s):  
Sely Megawati Wahyudi
Keyword(s):  
Credit Risk ◽  
Interest Rates ◽  
Risk Premium ◽  
Quantitative Research ◽  
Market Performance ◽  
Sampling Technique ◽  
Bank Capital ◽  
Regression Test ◽  
Loan Interest Rates ◽  
Research Period

This study aims to analyze the effect of credit interest rates and credit risk on market performance. Non Performing Loans (NPL) reflect bank credit risk, where the higher the NPL level, the greater the credit risk borne by the financing party. Due to high NPLs, financing will be more careful (selective) in channeling credit. This is due to the potential for uncollectible credit. The high NPL will increase the risk premium, which will lead to higher loan interest rates. Credit interest rates that are too high will reduce public demand for credit. The high NPL also resulted in the emergence of larger reserves, so that in the end bank capital was also eroded. Thus, the amount of NPL is one of the obstacles to the channeling of financing credit. The research method used is quantitative research. The sampling technique used was purposive sampling. The study was conducted on finance companies with a research period of 2015-2018. The analytical method used is the multiple regression test using SPSS.22 analysis tools, namely with a descriptive test, a classic assumption test, a model suitability test, and a regression test. The results of credit interest rates have no significant effect on market performance, and credit risk has a significant effect on market performance. This shows the interest of inventors to invest in shares of companies whose non-performing loans are not high even though the interest rates on these companies increase.

scholarly journals Municipal Bond Debt and Sustainability in a Non-Mature Financial Market: The Case of Italy

2018 ◽  
Vol 10 (9) ◽  
pp. 3249 ◽  
Author(s):  
Emanuele Padovani ◽  
Luca Rescigno ◽  
Jacopo Ceccatelli
Keyword(s):  
Credit Risk ◽  
Risk Premium ◽  
Criminal Activity ◽  
Bond Markets ◽  
Municipal Bond ◽  
The Sustainable Development ◽  
The Past ◽  
Development Literature ◽  
Risk Determinants ◽  
Financial Dependency

Local government (LG) debt increased worldwide during the past decade. Yet, LGs need increased access to financing so they can maintain and expand their community’s infrastructure. Expanding an LG’s bond-related debt (while continuing to meet ongoing debt-service obligations) is essential to its sustainability. An LG must both contain its credit risk and make its risk profile available to potential investors. Credit risk determinants in mature bond markets (e.g., the U.S.) have received considerable attention while those in non-mature markets have not. This paper contributes to the sustainable development literature by (a) identifying the risk-premium drivers in non-mature markets (using the bond market for Italian LGs as an example); and (b) providing LG policymakers with guidance on formulating policies to reduce their debt cost (either directly, by targeting its determinants, or indirectly, by improving the bond market’s functioning). LGs with comparatively high financial dependency on other governments, high criminal activity, and low operating revenues incurred higher bond-related costs than LGs without these characteristics. These LGs can improve their sustainability by (a) providing transparent and understandable financial information to potential investors; (b) reducing criminal activity; and, (c) increasing the frequency of external auditing.

scholarly journals The Credit Risk Premium in a Disaster-Prone World

2009 ◽  
Author(s):  
Yanhui Zhu ◽  
Laurence S. Copeland
Keyword(s):  
Credit Risk ◽  
Risk Premium
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