RT Journal Article SR Electronic T1 Ibbotson’s Default Premium: Risky Data JF The Journal of Investing FD Institutional Investor Journals SP 95 OP 105 DO 10.3905/joi.2013.22.2.095 VO 22 IS 2 A1 Winfried G. Hallerbach A1 Patrick Houweling YR 2013 UL https://pm-research.com/content/22/2/95.abstract AB Ibbotson’s “Stocks, Bonds, Bills and Inflation” dataset is widely used because it provides monthly U.S. financial data series going back to as early as 1926. In this dataset, the “default premium” is calculated as the difference between the total returns on long-term corporate bonds and long-term government bonds. This excess return is used in empirical research to represent the compensation for default risk exposure. In this article we show that this default premium is seriously flawed in two ways: 1) It is not based on subtracting maturity-matched government bonds from corporate bonds, and therefore is contaminated with a considerable interest rate component, and 2) it is based on very high-quality corporate bonds and hence rather insensitive to market-wide changes in default risk. These maturity and quality biases seriously limit the use of the Ibbotson default premium series in empirical research, because instead of reflecting pure default risk, it also (negatively) reflects interest rate risk.TOPICS: Fixed income and structured finance, analysis of individual factors/risk premia