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http://ssrn.com/abstract=1735162
 
 

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Term Structure of Credit Default Swap Spreads and Cross-Section of Stock Returns


Bing Han


University of Toronto, Rotman School of Management

Yi Zhou


Florida State University, College of Business, Department of Finance

March 1, 2011

McCombs Research Paper Series No. FIN-01-11
AFA 2012 Chicago Meetings Paper

Abstract:     
The slope of a firm's term structure of credit default swap (CDS) spreads (five-year spread minus one-year spread) negatively predicts future stock returns. Stocks with low CDS slope on average outperform stocks with high CDS slope by over 1% each month for the next six months. Our result can not be explained by standard risk factors, stock characteristics, default risk measures or changes in CDS spreads. We find that CDS slope positively predicts future changes in CDS spreads, but the information content of CDS slope only slowly gets incorporated into stock price. CDS slope predicts return mainly for stocks facing high arbitrage costs.

Number of Pages in PDF File: 43

Keywords: credit default swap, term structure, cross-section of stock return, default risk premium, slow information diffusion

JEL Classification: G12

working papers series





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Date posted: January 7, 2011 ; Last revised: June 18, 2011

Suggested Citation

Han, Bing and Zhou, Yi, Term Structure of Credit Default Swap Spreads and Cross-Section of Stock Returns (March 1, 2011). McCombs Research Paper Series No. FIN-01-11; AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1735162 or http://dx.doi.org/10.2139/ssrn.1735162

Contact Information

Bing Han (Contact Author)
University of Toronto, Rotman School of Management ( email )
Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)
Yi Zhou
Florida State University, College of Business, Department of Finance ( email )
353 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-7865 (Phone)
850-644-4225 (Fax)
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