Comments on: Default Rates and Static Analysis http://chicagoboyz.net/archives/6482.html Some Chicago Boyz know each other from student days at the University of Chicago. Others are Chicago boys in spirit. The blog name is also intended as a good-humored gesture of admiration for distinguished Chicago boys including those pictured above. Fri, 25 May 2012 16:07:14 +0000 hourly 1 http://wordpress.org/?v=3.0.4 By: aaron http://chicagoboyz.net/archives/6482.html/comment-page-1#comment-284621 aaron Tue, 09 Dec 2008 15:12:28 +0000 http://chicagoboyz.net/?p=6482#comment-284621 Yes, I think the high rate the govevernment is paying out is drying that out. It's crowding out the risk premium. The returns people would expect on risky investments is unrealistic absolute terms. A 20% return isn't a very reasonable expectation. If the risk free rate was 1-2% (inflation adjusted), a 9% return would look good. Now, the current bond interest rate is 5-6% (0 or negative inflation). A risky investment produces only 3.3-4 times the risk free rate, vs 4.5-9 times before. Yes, I think the high rate the govevernment is paying out is drying that out. It’s crowding out the risk premium. The returns people would expect on risky investments is unrealistic absolute terms. A 20% return isn’t a very reasonable expectation.

If the risk free rate was 1-2% (inflation adjusted), a 9% return would look good. Now, the current bond interest rate is 5-6% (0 or negative inflation). A risky investment produces only 3.3-4 times the risk free rate, vs 4.5-9 times before.

]]> By: Mitch http://chicagoboyz.net/archives/6482.html/comment-page-1#comment-284532 Mitch Tue, 09 Dec 2008 02:29:05 +0000 http://chicagoboyz.net/?p=6482#comment-284532 I had the same impression about the credit markets over the last several years. It looks to me like there was virtually no liquidity premium, and the big players seemed to think they had hedged away any risk premium. Turns out that wasn't so, I guess. I had the same impression about the credit markets over the last several years. It looks to me like there was virtually no liquidity premium, and the big players seemed to think they had hedged away any risk premium. Turns out that wasn’t so, I guess.

]]> By: Carl from Chicago http://chicagoboyz.net/archives/6482.html/comment-page-1#comment-284526 Carl from Chicago Tue, 09 Dec 2008 02:00:39 +0000 http://chicagoboyz.net/?p=6482#comment-284526 Uh... I wasn't commenting on the risk free rate. I was commenting on the high yield debt market. Uh… I wasn’t commenting on the risk free rate. I was commenting on the high yield debt market.

]]> By: aaron http://chicagoboyz.net/archives/6482.html/comment-page-1#comment-284478 aaron Mon, 08 Dec 2008 21:24:47 +0000 http://chicagoboyz.net/?p=6482#comment-284478 Risk free rate should barely be higher than inflation. Risk free rate should barely be higher than inflation.

]]> By: aaron http://chicagoboyz.net/archives/6482.html/comment-page-1#comment-284400 aaron Mon, 08 Dec 2008 13:41:12 +0000 http://chicagoboyz.net/?p=6482#comment-284400 Too high of a risk free rate draws money out private sector and makes the interest on private debt too high relative to the price. It makes debt riskier and less liquid. Too high of a risk free rate draws money out private sector and makes the interest on private debt too high relative to the price. It makes debt riskier and less liquid.

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