The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story

2015 ◽  
Author(s):  
Chris Godfrey ◽  
Chris Brooks
Keyword(s):  
Credit Risk ◽  
Risk Premium ◽  
Limits To Arbitrage ◽  
Premium Puzzle

scholarly journals Equity Risk Premium Puzzle: Evidence from Indonesia and Sri Lanka

2019 ◽  
Vol 55 (2) ◽  
pp. 239-248
Author(s):  
Prabath S. Morawakage ◽  
Pulukkuttige D. Nimal ◽  
Duminda Kuruppuarachchi
Keyword(s):  
Sri Lanka ◽  
Risk Premium ◽  
Equity Risk Premium ◽  
Equity Risk ◽  
Premium Puzzle

scholarly journals The Total Risk Premium Puzzle

2019 ◽  
Author(s):  
Òscar Jordà ◽  
Moritz Schularick ◽  
Alan Taylor
Keyword(s):  
Risk Premium ◽  
Total Risk ◽  
Premium Puzzle

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)

The Distress Anomaly is Deeper than you Think: Evidence from Stocks and Bonds

2021 ◽  
Author(s):  
Doron Avramov ◽  
Tarun Chordia ◽  
Gergana Jostova ◽  
Alexander Philipov
Keyword(s):  
Credit Risk ◽  
Financial Distress ◽  
Corporate Bonds ◽  
Time Varying ◽  
External Financing ◽  
Earnings Expectations ◽  
Limits To Arbitrage

Abstract The distress anomaly reflects the abnormally low returns of high credit risk stocks during financial distress. Evidence from stocks and corporate bonds reinforces the anomaly and challenges rationales based on shareholders’ ability to extract value from bondholders, time-varying betas, lottery-type preferences, biased earnings expectations, and limits-to-arbitrage. Moreover, mispricing of distressed stocks and bonds is associated with excess investment and excess external financing. Potential real distortions are materially understated when assessed based only on equity mispricing. We emphasize the important role of corporate bonds in dissecting the distress anomaly, and show that the anomaly is an unresolved puzzle.

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.

Continuous-Time Topics

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Portfolio Choice ◽  
Risk Premium ◽  
Cash Flows ◽  
Jump Processes ◽  
Portfolio Risk ◽  
Continuous Part ◽  
Jump Risks ◽  
Complete Market ◽  
Risk Neutral Probabilities ◽  
Premium Puzzle

The fundamental PDE for valuing cash flows or cash flow streams is explained. In a complete market, an investor’s optimal wealth satisfies the fundamental PDE, and this provides a means of calculating the optimal portfolio. Risk neutral probabilities and Girsanov’s theorem are explained. Jump processes, including Poisson processes, are introduced. The risk premium of an asset with jump risks depends on covariation of its continuous part with the continuous part of an SDF and the covariation of its discontinuous part with the discontinuous part of an SDF. Portfolio choice with internal habits is characterized. The ability of a representative investor model with an internal habit to explain the equity premium puzzle is discussed.

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