Are the Fama-French factors really compensation for distress risk?

Wilma de Groot and Joop Huij

Journal of International Money and Finance, 2018, vol. 86, issue C, 50-69

Abstract: In this paper, we revisit the question whether the Fama-French factors are manifestation of distress risk premiums. To this end, we develop new tests specifically aimed at dissecting the Fama-French factor returns from a distress risk premium. While we find that value and small-cap exposures are typically associated with distress risk, our results also indicate that distress risk is not priced and that the small-cap and value premiums are priced beyond distress risk. Moreover, the distress risk exposures of common small-cap and value factors do not have explanatory power in asset pricing tests. Our results are robust to international out-of-sample analyses and have important implications for investors engaging in small-cap and value strategies.

Keywords: Book-to-market effect; Value anomaly; Small-cap effect; Market efficiency; Default risk; Bankruptcy; Credit spread; Bond spread; Distress risk; Credit rating (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:86:y:2018:i:c:p:50-69

DOI: 10.1016/j.jimonfin.2018.03.002

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