The Bright Side of Distress Risk
69 Pages Posted: 31 Aug 2015 Last revised: 17 Sep 2019
Date Written: August 10, 2019
The paper shows that distressed firms have positive abnormal returns when aggregate volatility unexpectedly increases. This hedging property of distressed firms explains the puzzling negative relation between firm-specific distress risk and future alphas from benchmark asset-pricing models. Controlling for aggregate volatility risk exposure also explains why the negative relation is stronger for volatile firms and growth firms.
Keywords: distress, default, aggregate volatility risk, credit ratings, idiosyncratic volatility, anomalies
JEL Classification: G11, G12, E44
Suggested Citation: Suggested Citation