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Default risk premium and asset prices

Author

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  • Corvino, Raffaele
  • Fusai, Gianluca

Abstract

We estimate a standard structural model of credit risk to draw insights about the premium demanded by investors for bearing default risk, using data on credit default swaps and market capitalization. We pin down the daily market value of assets for a set of non-financial firms and uncover cross-sectional heterogeneity in terms of the magnitude and time variation of the premium. By exploring the link between asset and default risk premia, we show that this heterogeneity closely depends on the relationship between the firm-specific market value of the assets and the business cycle.

Suggested Citation

  • Corvino, Raffaele & Fusai, Gianluca, 2022. "Default risk premium and asset prices," Journal of Financial Stability, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finsta:v:60:y:2022:i:c:s1572308922000390
    DOI: 10.1016/j.jfs.2022.101014
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    References listed on IDEAS

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    1. Palazzo, Berardino & Yamarthy, Ram, 2022. "Credit risk and the transmission of interest rate shocks," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 120-136.

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    More about this item

    Keywords

    Default risk; Risk premium; Structural model; Assets value; Business cycle;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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