Download This PaperCredit Beta
69 Pages Posted: 15 Aug 2018 Last revised: 6 Feb 2024
Date Written: October 1, 2019
Abstract
I extract a latent systematic credit risk factor from the cross-section of CDS returns. Exposure to this risk factor, i.e., credit beta, is also a strong determinant of the cross-section of stock returns, while it is distinct from exposures to other equity, bond, and downside risk factors. Consistent with theory, credit betas are related to ex-ante measures of firm-level default risk, subsuming the default risk premium. Credit betas also link systematic risk to firm fundamentals by reflecting cash flow risk in stock portfolios. My findings highlight the importance of credit markets in providing a risk-based view of stock returns.
Keywords: Cross-sectional asset pricing, systematic credit risk, CDS Returns, stock returns, credit beta
JEL Classification: G12
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