An investor with lower-than-average exposure to recession risk can earn a premium by creating a greater-than-average exposure to recession risk factor. Pls explain the concept
Consider two investors in high yield bonds: one is a wealthy individual, the other a retiree dependent on bond income. A recession could widen credit spreads / lead to defaults and adversely impact high yield bonds.
The retiree is risk averse, and would prefer to sell high yield bonds if recession expectations are high. The wealthy investor could provide liquidity to the seller (thus taking on greater than average recession risk) and acquire the bonds at a discount to earn a premium (assuming a recession does not come about as expected by the seller).