The systematic price of credit risk

Using corporate bond index series over a period of 16 years, we provide a detailed decomposition of a bond’s expected returns. We are able to distinguish between the pre- mium related to systematic default risk and the premium related to the default event. We further analyze the determinants of expected returns and of the identified risk premiums, using variables constructed from credit markets, from stock markets and from moment related risk. The variables successfully explain a large part of the variations in those two premiums, however the signs on the variables are exactly opposed in the explanation of the systematic default risk premium and the default event premium.