EconPapers    
Economics at your fingertips  
 

Is there a distress risk anomaly ? pricing of systematic default risk in the cross section of equity returns

Deniz Anginer () and Celim Yildizhan

No 5319, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Debt Markets; Mutual Funds; Emerging Markets; Bankruptcy and Resolution of Financial Distress; Deposit Insurance (search for similar items in EconPapers)
Date: 2010-01-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-ias and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... ered/PDF/WPS5319.pdf (application/pdf)

Related works:
Working Paper: Is there a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross Section of Equity Returns (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:5319

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().

 
Page updated 2021-02-18
Handle: RePEc:wbk:wbrwps:5319