Default Risk and the Market Skewness Risk Effect

46 Pages Posted: 30 Oct 2016

See all articles by Zhongxiang Xu

Zhongxiang Xu

University of Nottingham, University of Nottingham, Students; Nottingham University Business School

Xiafei Li

Nottingham University Business School; affiliation not provided to SSRN

Thanaset Chevapatrakul

Nottingham University Business School

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester

Date Written: September 27, 2016

Abstract

We examine the impact of default risk on the market skewness risk effect that stocks with low market skewness risk outperform stocks with high risk documented in the previous literature. We find that the effect is strong among large, growth, and low default risk stocks, but vanishes among small, value, and high default risk stocks due to investors’ greater demand for hedging against downside risk. Our results suggest that the positive skewness preference theory is contradicted by investors’ hedging demand for high default risk stocks. The hedging hypothesis is also supported in a sample period after the 2007-2008 financial crisis.

Keywords: Asset pricing, market skewness risk, default risk

JEL Classification: G01, G12

Suggested Citation

Xu, Zhongxiang and Li, Xiafei and Li, Xiafei and Chevapatrakul, Thanaset and Gao, Ning, Default Risk and the Market Skewness Risk Effect (September 27, 2016). Available at SSRN: https://ssrn.com/abstract=2859983 or http://dx.doi.org/10.2139/ssrn.2859983

Zhongxiang Xu

University of Nottingham, University of Nottingham, Students ( email )

Nottingham
United Kingdom

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Xiafei Li (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9518603 (Phone)

affiliation not provided to SSRN

Thanaset Chevapatrakul

Nottingham University Business School ( email )

Jubuliee Campus
Wollaton Road
Nottingham, Nottinghamshire NG8 1BB
Great Britain

Ning Gao

Manchester Accounting and Finance Group, Alliance Manchester Business School, University of Manchester ( email )

Booth Street East
.
Manchester, M13 9SS
United Kingdom

HOME PAGE: http://www.research.manchester.ac.uk/portal/Ning.Gao.html

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