Hidden in the Factors? The Effect of Credit Risk on the Cross-Section of Equity Returns

(S-WoPEc) Scandinavian Working Papers in Economics No 2011-38

23 Pages Posted: 5 Nov 2011 Last revised: 15 Oct 2015

See all articles by Caren Yinxia Nielsen

Caren Yinxia Nielsen

Copenhagen Business School - Center for Corporate Governance; Knut Wicksell Centre for Financial Studies--Lund University

Date Written: October 7, 2015

Abstract

We disentangle the complexity of the distress risk premium in stock returns using the risk-neutral measure of credit risk (valued by CDS spread) and investigate the relation between credit risk and the market beta, size, value, and momentum effects. Consistent with the argument of the negative distress premium, firms with higher credit risk have lower stock returns, and a positive value effect is concentrated in high credit quality firms. However, credit risk is positively priced in returns on stocks that won most in the past year and that, during the crisis, comove most with the market. A positive momentum effect is concentrated in high credit risk firms. Furthermore, the size effect, but not the value effect, could be attributed to a positive credit risk effect.

Keywords: sset pricing; Equity returns; Size effect; Value effect; Credit risk effect; Credit default swap

JEL Classification: G11; G21; G28

Suggested Citation

Nielsen, Caren Yinxia, Hidden in the Factors? The Effect of Credit Risk on the Cross-Section of Equity Returns (October 7, 2015). (S-WoPEc) Scandinavian Working Papers in Economics No 2011-38 , Available at SSRN: https://ssrn.com/abstract=1954677 or http://dx.doi.org/10.2139/ssrn.1954677

Caren Yinxia Nielsen (Contact Author)

Copenhagen Business School - Center for Corporate Governance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+4538152694 (Phone)

HOME PAGE: http://https://sites.google.com/site/carensprofhome/

Knut Wicksell Centre for Financial Studies--Lund University ( email )

Box 7082
Lund, S220 07
Sweden

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