Changing Risk Perception and the Time-Varying Price of Risk

Thomas Gehrig; Roland Fuess; Philipp Rindler

doi:10.1093/rof/rfv046

Changing Risk Perception and the Time-Varying Price of Risk

Thomas Gehrig, Roland Fuess, Philipp Rindler

Department of Finance

Publications: Contribution to journal › Article › Peer Reviewed

Abstract

This article investigates the impact of changes in risk perception on bond markets triggered by the 2007–08 financial crisis. Using a methodology novel to empirical finance, we quantify the increase in credit spreads caused by changes in risk pricing and changes in risk factors. The lasting increase in credit spreads is almost exclusively due to time-varying prices of risk. We interpret this as a change in risk erception which provides a possible solution to the credit spread puzzle. Default premia spiked during the crisis and did not return to their pre-crisis levels. Liquidity premia increased during and after the crisis.

Original language	English
Article number	20(4)
Pages (from-to)	1549-1585
Number of pages	37
Journal	Review of Finance: the journal of the European Finance Association
Volume	20
Issue number	4
Early online date	16 Sept 2015
DOIs	https://doi.org/10.1093/rof/rfv046
Publication status	Published - Jul 2016

Austrian Fields of Science 2012

502045 Behavioural economics
502025 Econometrics
502009 Corporate finance

Keywords

AMBIGUITY
BOND
CORPORATE YIELD SPREADS
CREDIT SPREADS
DECOMPOSITION
DEFAULT
DYNAMIC EQUILIBRIUM
LIQUIDITY RISK
RETURNS
TERM STRUCTURES
C21
G12

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10.1093/rof/rfv046

Cite this

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title = "Changing Risk Perception and the Time-Varying Price of Risk",

abstract = "This article investigates the impact of changes in risk perception on bond markets triggered by the 2007–08 financial crisis. Using a methodology novel to empirical finance, we quantify the increase in credit spreads caused by changes in risk pricing and changes in risk factors. The lasting increase in credit spreads is almost exclusively due to time-varying prices of risk. We interpret this as a change in risk erception which provides a possible solution to the credit spread puzzle. Default premia spiked during the crisis and did not return to their pre-crisis levels. Liquidity premia increased during and after the crisis.",

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author = "Thomas Gehrig and Roland Fuess and Philipp Rindler",

note = "Publisher Copyright: {\textcopyright} 2015 The Authors 2015. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: [email protected].",

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AU - Gehrig, Thomas

AU - Fuess, Roland

AU - Rindler, Philipp

N1 - Publisher Copyright: © 2015 The Authors 2015. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: [email protected].

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KW - BOND

KW - CORPORATE YIELD SPREADS

KW - CREDIT SPREADS

KW - DECOMPOSITION

KW - DEFAULT

KW - DYNAMIC EQUILIBRIUM

KW - LIQUIDITY RISK

KW - RETURNS

KW - TERM STRUCTURES

KW - C21

KW - G12

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VL - 20

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JO - Review of Finance: the journal of the European Finance Association

JF - Review of Finance: the journal of the European Finance Association

IS - 4

M1 - 20(4)

ER -

Changing Risk Perception and the Time-Varying Price of Risk

Abstract

Austrian Fields of Science 2012

Keywords

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