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Measuring risk


How much risk is in the economy? It depends what you mean by risk. If you want to know, roughly, the level of risk that businesses cannot honor their debts, then you want to look at the risk premium. The risk premium quantifies the differences in the yields of bonds in different risk categories. This risk premium is not constant through time: It changes as the overall economy goes through its ups and downs that impact businesses. Here we look at the difference in yields between Moody’s Aaa and Baa corporate bonds. It is clearly visible that much risk was present in the 1920s, 1930s, and 1940s and also in several of the recent recessions, in particular the previous one. Lately, this risk has largely been vanishing, as corroborated by the St Louis Fed Financial Stress Index©.

How this graph was created: Search for “Moody’s” and select the Aaa rate at a monthly frequency (for a longer sample). Then you add the Baa series and apply transformation “b-a.”

Suggested by Christian Zimmermann

View on FRED, series used in this post: AAA, BAA


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