Cyclical variability of bond risk premia. A note


Using a newly developed model, this paper investigates the cyclical behavior of bond risk premia. It is shown that cyclical variability may result simply from the way risk premia are calculated and does not depend on changes over the business cycle in probability of default, investors' attitudes toward risk or institutional behavior. In addition, expectations concerning the likely time of default are shown to be a potential source of cyclical variability and to imply a specific cyclical pattern of risk premia. © 1985.

Publication Title

Journal of Banking and Finance