Hidden in the Factors? The Effect of Credit Risk on the Cross-section of Equity Returns?

Research output: Working paperResearch

Abstract

We disentangle the complexity of the distress risk premium in stock returns using the risk-neutral measure of credit risk (valued by CDS spread) and investigate the relation between credit risk and the market beta, size, value, and momentum effects. Consistent with the argument of the negative distress premium, firms with higher credit risk have lower stock returns, and a positive value effect is concentrated in high credit quality firms. However, credit risk is positively priced in returns on stocks that won most in the past year and that, during the crisis, comove most with the market. A positive momentum effect is concentrated in high credit risk firms. Furthermore, the size effect, but not the value effect, could be attributed to a positive credit risk effect.
Original languageEnglish
Place of PublicationLund
PublisherLunds Universitet
Number of pages24
Publication statusPublished - 2015
Externally publishedYes
SeriesWorking paper. Department of Economics, Lund University
Number2011:38

Keywords

  • Asset pricing
  • Equity returns
  • Size effect
  • Value effect
  • Credit risk effect
  • Credit default swap

Cite this