The Effect of Credit Risk on Stock Returns

Journal of Economic Research, Vol. 14, No. 2, pp. 49-67, 2009

19 Pages Posted: 16 Jun 2009 Last revised: 18 Apr 2013

See all articles by ChoongOh Kang

ChoongOh Kang

Citigroup Global Markets Japan Inc.

Hyoung Goo Kang

Hanyang University

Date Written: January 12, 2009

Abstract

This paper investigates the effect of credit risk on the return of stocks. We construct a systematic factor in relation to credit risk using the credit spreads of individual firms measured from the Merton (1974) model. This enables us to include firms without credit spreads or ratings information in our analysis so that we are free of sample selection bias. The credit factor captures a systematic risk in the Korean stock market, which the standard Fama-French three factors (market, size and value) and the momentum factor cannot fully explain.

Keywords: equity return, credit risk, credit ractor, Fama- French Factors, Merton model

JEL Classification: G12, G13

Suggested Citation

Kang, ChoongOh and Kang, Hyoung Goo, The Effect of Credit Risk on Stock Returns (January 12, 2009). Journal of Economic Research, Vol. 14, No. 2, pp. 49-67, 2009 , Available at SSRN: https://ssrn.com/abstract=1419963

ChoongOh Kang

Citigroup Global Markets Japan Inc. ( email )

Shin-Marunouchi Building
1-5-1 Marunouchi
Tokyo, 100-6520
Japan

Hyoung Goo Kang (Contact Author)

Hanyang University ( email )

222 Wangsimniro
Seongdong-gu
Seoul, 133-791
Korea, Republic of (South Korea)

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