Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93645
Authors: 
Bai, Jennie
Collin-Dufresne, Pierre
Goldstein, Robert S.
Helwege, Jean
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 577
Abstract: 
Reduced-form models of default that attribute a large fraction of credit spreads to compensation for credit event risk typically preclude the most plausible economic justification for such risk to be priced
Subjects: 
namely, a contagious response of the market portfolio during the credit event. When this channel is introduced within a general equilibrium framework for an economy comprised of a large number of firms, credit event risk premia have an upper bound of just a few basis points and are dwarfed by the contagion premium. We provide empirical evidence supporting the view that credit event risk premia are minuscule.
JEL: 
G12
G10
Document Type: 
Working Paper

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