Default Risk in Equity Returns

59 Pages Posted: 21 Jan 2002

See all articles by Maria Vassalou

Maria Vassalou

Centre for Economic Policy Research (CEPR)

Yuhang Xing

Rice University

Multiple version iconThere are 2 versions of this paper

Abstract

This is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the book-to-market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama-French (FF) factors SMB and HML contain some default-related information, but this is not the main reason that the FF model can explain the cross-section of equity returns.

Keywords: default risk, equities, Merton's (1974) model, size and book-to-market effects

JEL Classification: G33, G12

Suggested Citation

Vassalou, Maria and Xing, Yuhang, Default Risk in Equity Returns. Available at SSRN: https://ssrn.com/abstract=297319 or http://dx.doi.org/10.2139/ssrn.297319

Maria Vassalou (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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