The Market Price of Credit Risk and Economic States

Posted: 18 Feb 2015 Last revised: 3 Mar 2015

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Jesper Haga

Hanken School of Economics - Department of Finance and Statistics

Date Written: February 8, 2015

Abstract

This paper proposes a market-wide credit risk factor for the US stock market and investigates its properties that are dependent on economic conditions. The market price of credit risk is found to be statistically significantly negative, supporting earlier studies. However, a sample-split analysis reveals that this negative pay-off is non-existent in a later subsample, indicating that the credit risk puzzle is based on temporary mispricing related to the earlier subsample. Further investigation shows that mispricing in the earlier period was mainly driven by positive pay-offs of low credit risk firms, while high credit risk firms did not generate significant returns in any of the sub-periods.

Keywords: Asset pricing, Credit rating, Credit risk, Economic states, Business cycle, Market price of credit risk

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Haga, Jesper, The Market Price of Credit Risk and Economic States (February 8, 2015). Empirical Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2565741 or http://dx.doi.org/10.2139/ssrn.2565741

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

Jesper Haga

Hanken School of Economics - Department of Finance and Statistics ( email )

P.O. Box 287
FIN-65101 Vasa
Finland

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