Linking Credit Risk Premia to the Equity Premium

Linking Credit Risk Premia to the Equity Premium

We estimate the equity premium using CDS spreads and structural models of default. Our estimates yield equity premia of 6.50% (U.S.), 5.44% (Europe) and 6.21% (Asia) based on 5year CDS spreads from 2003-2007. Due to some conservative assumptions these estimates are upper limits for the equity premium. Using 3-, 7and 10-year CDS maturities yields similar results and o ers an opportunity to estim...

Corporate Credit Risk Premia Corporate Credit Risk Premia

We measure credit risk premia—prices for bearing corporate default risk in excess of expected default losses—using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit ri...

Capturing Equity Risk Premia

Corporate Credit Risk Premia

We measure credit risk premia—prices for bearing corporate default risk in excess of expected default losses—using Markit CDS and Moody’s Analytics EDF data. We find dramatic variation over time in credit risk premia, with peaks in 2002, during the global financial crisis of 2008-09, and in the second half of 2011. Even after normalizing these premia by expected default losses, median credit ri...

Measuring the equity risk premium

We use surveys of economic forecasts to derive a forward-looking estimate of the US equity risk premium (ERP) relative to government bonds. Our ERP measure helps predict short-term relative returns between stocks and bonds. Over the period we studied, low readings of the ERP tended to adjust back to the mean via a rally in the bond market rather than a fall in stock prices. We do not generalise...