Asset pricing

• Systematic Risk, Debt Maturity and the Term Structure of Credit Spreads

  Staff Working Paper 2012-27 Hui Chen, Yu Xu, Jun Yang

  We build a dynamic capital structure model to study the link between systematic risk exposure and debt maturity, as well as their joint impact on the term structure of credit spreads. Our model allows for time variation and lumpiness in the maturity structure. Relative to short-term debt, long-term debt is less prone to rollover risks, but its illiquidity raises the costs of financing.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Debt management JEL Code(s): G, G3, G32, G33
• August 16, 2012

  Global Risk Premiums and the Transmission of Monetary Policy

  Bank of Canada Review - Summer 2012 Gregory Bauer, Antonio Diez de los Rios

  An important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Asset pricing, Financial markets, Monetary policy transmission JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15