Default Risk, Size and the Business Cycle: Three Decades of Australian Asset Pricing Evidence
31 Pages Posted: 26 Feb 2008
Date Written: February 24, 2008
We revisit the role of default risk in asset pricing. The detail of our dataset allows us to undertake this analysis on a previously ignored segment of the market - microcap stocks, allegedly vulnerable to default risk. The cross-equation restrictions in our baseline models are rejected, but the risk premia are positive and statistically significant. When we allow for intertemporal risk premia, our findings remain significant. We also find that the estimated default premium increases over time. When we condition on the business cycle, we find that the default risk premium is twice as high during expansions than during contractions.
Keywords: Default risk, Business cycle, Conditional Asset pricing, Microcaps
JEL Classification: G12
Suggested Citation: Suggested Citation