Systematic default and return predictability in the stock and bond markets

Jack Bao, Kewei Hou and Shaojun Zhang

Journal of Financial Economics, 2023, vol. 149, issue 3, 349-377

Abstract: We construct a measure of systematic default defined as the probability that many firms default at the same time. We account for correlations in defaults between firms through exposures to common shocks. Systematic default spikes during recessions, is correlated with macroeconomic indicators, and predicts future realized defaults. More importantly, it predicts future equity and corporate bond index returns both in- and out-of-sample. Finally, we find that the cross-section of average stock returns is related to firm-level exposures to systematic default risk.

Keywords: Systematic risk; Structural model; Joint default; Predictability; Stock returns; Bond returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 G33 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Systematic Default and Return Predictability in the Stock and Bond Markets (2023)
Working Paper: Systemic Default and Return Predictability in the Stock and Bond Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:3:p:349-377

DOI: 10.1016/j.jfineco.2023.05.006

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