The Cross-Section of Credit Risk Premia and Equity Returns

Niels Friewald, Christian Wagner, Josef Zechner

Publikation: Working paperForskning

Abstrakt

We explore the link between a firm's stock returns and its credit risk using a simple insight from structural models following Merton (1974): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or by risk-neutral default probabilities alone. This sheds new light on the "distress puzzle", i.e. the lack of a positive relation between equity returns and default probabilities reported in previous studies.
OriginalsprogEngelsk
Udgivelsesstedwww
UdgiverSSRN: Social Science Research Network
Antal sider49
StatusUdgivet - 2013

Emneord

  • Equity returns
  • cross-sectional asset pricing
  • credit default swaps
  • credit risk premia
  • default risk

Citationsformater