The World Price of Credit Risk

48 Pages Posted: 17 Mar 2012

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Tarun Chordia

Emory University - Department of Finance

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2012

Abstract

Global asset-pricing models have failed to capture the cross section of country equity returns. Emerging markets have displayed strikingly large and robust positive pricing errors. Country-level characteristics have played a significant role in pricing international equities, suggesting that financial markets may not be fully integrated. This paper offers a risk-based explanation that resolves these deviations from global asset pricing. A world credit risk factor explains the positive pricing errors in emerging market equities. Moreover, in the presence of this credit risk factor, country-level characteristics no longer play a role in pricing global equities. Factor models that include the world credit risk factor uniformly outperform, both in the time-series and the cross-section, competing specifications that exclude this factor. Over the 1989-2009 period, the risk premium for systematic credit risk exposure is 83 basis points per month and its importance has dramatically increased in recent years.

Suggested Citation

Avramov, Doron and Chordia, Tarun and Jostova, Gergana and Philipov, Alexander, The World Price of Credit Risk (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023864 or http://dx.doi.org/10.2139/ssrn.2023864

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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