Default Risk, Size and the Business Cycle: Three Decades of Australian Asset Pricing Evidence

31 Pages Posted: 26 Feb 2008

See all articles by H. Chan

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Robert W. Faff

University of Queensland

Paul Kofman

The University of Melbourne

Date Written: February 24, 2008

Abstract

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

Chan, Howard and Faff, Robert W. and Kofman, Paul, Default Risk, Size and the Business Cycle: Three Decades of Australian Asset Pricing Evidence (February 24, 2008). Available at SSRN: https://ssrn.com/abstract=1097444 or http://dx.doi.org/10.2139/ssrn.1097444

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Paul Kofman (Contact Author)

The University of Melbourne ( email )

Faculty of Economics and Commerce
Department of Finance
Parkville, Victoria 3010
Australia
61 3 8344 3794 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
189
Abstract Views
1,134
rank
157,944
PlumX Metrics