Click here for search results
Is there a distress risk anomaly ? pricing of systematic default risk in the cross section of equity returns, Volume 1
 
Author:Anginer, Deniz; Yildizhan, Celim; Country:World;
Date Stored:2012/12/13Document Date:2010/01/01
Document Type:Policy Research Working PaperSubTopics:Bankruptcy and Resolution of Financial Distress; Emerging Markets; Debt Markets; Deposit Insurance; Mutual Funds
Language:EnglishRegion:The World Region
Report Number:WPS5319Collection Title:Policy Research working paper ; no. WPS 5319
Volume No:1  

Summary: The standard measures of distress risk ignore the fact that firm defaults are correlated and that some defaults are more likely to occur in bad times. The paper uses risk premium computed from corporate credit spreads to measure a firm's exposure to systematic variation in default risk. Unlike previously used measures that proxy for a firm's physical probability of default, credit spreads proxy for a risk-adjusted default probability and thereby explicitly account for the non-diversifiable component of distress risk. In contrast to prior findings in the literature, the authors find that stocks that have higher credit risk premia, that is stocks with higher systematic default risk exposures, have higher expected equity returns. Consistent with structural models of default, they show that the premium to a high-minus-low systematic default risk hedge portfolio is largely explained by the market factor. The authors confirm the robustness of these results by using an alternative systematic default risk factor for firms that do not have bonds outstanding. The results show no evidence of firms with high systematic default risk exposure delivering anomalously low returns.

Official Documents
Official, scanned versions of documents (may include signatures, etc.)
File TypeDescriptionFile Size (mb)
PDF 50 pagesOfficial version*3.5 (approx.)
TextText version**
How To Order

* The official version is derived from scanning the final, paper copy of the document and is the official,
archived version including all signatures, charts, etc.
** The text version is the OCR text of the final scanned version and is not an accurate representation of the final text.
It is provided solely to benefit users with slow connectivity.



Permanent URL for this page: http://go.worldbank.org/AZHSNSIO10