Systematic Default and Return Predictability in the Stock and Bond Markets

Jack Bao, Kewei Hou and Shaojun Zhang
Additional contact information
Jack Bao: U of Delaware
Kewei Hou: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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.

JEL-codes: E32 G12 G13 G17 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-bec, nep-fdg, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (2)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4458306

Related works:
Journal Article: 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:ecl:ohidic:2023-13

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