Wharton finance professor Richard Marston discusses the markets' perception of risk in this video interview. Marston is one of seven Wharton professors whom Knowledge@Wharton spoke with for this special report on the credit crisis.
An edited version of the transcript follows.
Knowledge@Wharton: Looking back over the past few years, risk premiums have fluctuated dramatically, and most people don't understand what this means. Can you explain it?
Marston: Well, it's natural, over time, for markets to change in terms of interest rates, in terms of the spreads of riskier assets over U.S. government bonds, to see the stock market fluctuate. In the case of bonds, though, it's much easier to understand what's going on in terms of being able to measure what's happening, in that we have the spread of interest rates between riskier bonds and Treasury Bonds.
And if you watch the spread over time, you can get a good indication of what the market actually thinks is happening, in terms of risk. And recently, prior to the crisis, the spreads on high-yield bonds and emerging market bonds came down to much lower levels than normal.
See full Interview.
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