Distressed Stocks in Distressed Times

53 Pages Posted: 2 Dec 2015 Last revised: 27 Mar 2017

See all articles by Assaf Eisdorfer

Assaf Eisdorfer

University of Connecticut - Department of Finance

Efdal Misirli

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: March 26, 2017

Abstract

This paper shows that the well-documented distress anomaly does not hold in market downturns. The asset beta and financial leverage of distressed stocks rise significantly during bear markets, resulting in a dramatic increase in their equity beta. Hence, a long/short healthy-minus-distressed trading strategy leads to significant losses when the market rebounds. Managing this risk mitigates the severe losses of financial-distress strategies and significantly improves their Sharpe ratios. Our results remain strongly significant controlling for the momentum effect and are robust to various estimation procedures.

Keywords: Anomalies, Financial distress, Time-varying risk

JEL Classification: G11, G12

Suggested Citation

Eisdorfer, Assaf and Misirli, Efdal, Distressed Stocks in Distressed Times (March 26, 2017). Available at SSRN: https://ssrn.com/abstract=2697771 or http://dx.doi.org/10.2139/ssrn.2697771

Assaf Eisdorfer

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Efdal Misirli (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

502 S Sharp St
Baltimore, MD 21201
United States

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