Default Risk Premia and Asset Returns

62 Pages Posted: 19 Mar 2006 Last revised: 6 Apr 2008

See all articles by Antje Berndt

Antje Berndt

Australian National University, College of Business and Economics

Aziz A. Lookman

Moody's Research Labs; Amazon Capital Services

Iulian Obreja

SEC

Date Written: September 10, 2007

Abstract

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.

Keywords: default risk premia, asset pricing across multiple markets

JEL Classification: G12, G13

Suggested Citation

Berndt, Antje and Lookman, Aziz A. 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

Antje Berndt (Contact Author)

Australian National University, College of Business and Economics ( email )

Australian National University
Bldg 26C
Canberra, ACT 2601
Australia

HOME PAGE: http://https://cbe.anu.edu.au/about/staff-directory/professor-antje-berndt

Aziz A. Lookman

Moody's Research Labs ( email )

99 Church Street
New York, NY 10007
United States

HOME PAGE: http://sites.google.com/site/azizlookman/

Amazon Capital Services ( email )

New York, NY 10007
United States

Iulian Obreja

SEC ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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