Seminar – The financial premium

Peter Feldhütter, Professor of Finance, Copenhagen Business School

We show theoretically and empirically that bonds issued by financial institutions have higher credit spreads than similar bonds issued by non-financial institutions and we denote this difference the financial premium. Theoretically, the financial premium arises in a model where banks have a diversified portfolio of firm bonds on the balance sheet and therefore bank bonds reflect more systematic risk than the underlying firm bonds. Empirically, we document that credit spreads of bonds issued by U.S. financial institutions are substantially higher than credit spreads of bonds issued by firms in other industries when controlling for bond maturity, rating, recovery rate and loss rate; on average 43bps corresponding to a 31% higher credit spread. The financial premium is higher for shorter maturities, lower ratings, and in crises. Furthermore, the premium is related to existing measures of systemic risk and predicts economic activity.

Speaker bio

Peter Feldhütter joined the Department of Finance as Professor in 2017. He obtained his PhD from CBS and worked at London Business School before returning to CBS. His research focuses on how prices in fixed income markets are affected by illiquidity, credit risk, and supply/demand imbalances. In particular, he has published several studies on the illiquidity of the US corporate bond market. He has received a number of research awards, including the Best Paper in Quantitative Investments Award at the Western Finance Association’s annual meeting, Q-Group’s Jack Treynor Prize, Wharton’s Jacobs Levy Equity Management Center for Quantitative Research’s Outstanding Paper Award, and Nykredit’s Talented Researcher Award.

A light lunch for participants will be available in Castle Teaching Room from 12:15.

For more information, please contact Emily Brown.