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Default Risk Premia and Asset Returns

Antje Berndt

Poole College of Management, NC State University

Aziz A. Lookman


Iulian Obreja


September 10, 2007

AFA 2007 Chicago Meetings Paper

We identify a common default risk premia (DRP) factor in the risk-adjusted excess returns on pure default-contingent claims. Asset pricing tests using almost 50 corporate bond portfolios sorted on rating, maturity or industry suggest that the DRP factor is priced in the corporate bond market. For index put option portfolios sorted on maturity and moneyness, both average returns and DRP beta estimates become more negative with decreasing time to maturity. There is little to no evidence of the DRP factor being priced in equity markets. Most of the variation in DRP is explained by the portion DRP^{JtD} due to common jump-to-default risk premia. A theoretical framework where DRP^{JtD} is part of the pricing kernel supports our empirical findings.

Number of Pages in PDF File: 62

Keywords: default risk premia, asset pricing across multiple markets

JEL Classification: G12, G13

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Date posted: March 19, 2006 ; Last revised: April 6, 2008

Suggested Citation

Berndt, Antje and Lookman, Aziz A. and Obreja, Iulian, Default Risk Premia and Asset Returns (September 10, 2007). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891746 or http://dx.doi.org/10.2139/ssrn.891746

Contact Information

Antje Berndt (Contact Author)
Poole College of Management, NC State University ( email )
Hillsborough Street
Raleigh, NC 27695
United States
Aziz A. Lookman
AIG ( email )
New York, NY
United States
HOME PAGE: http://www.linkedin.com/in/azizlookman
Iulian Obreja
SEC ( email )
450 Fifth Street, NW
Washington, DC 20549-1105
United States
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