Risk aversion and risk premia in the CDS market

Credit default swap (CDS) spreads compensate investors for expected loss, but they also contain risk premia because of investors' aversion to default risk. We estimate CDS risk premia and default risk aversion to have been highly volatile during 2002- 2005. Both measures appear to be related to fundamental macroeconomic factors, such as the stance of monetary policy, and technical market factors, such as issuance of collateralised debt obligations.

JEL classification: G120, G130, G140.