IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v50y2016i3d10.1007_s00181-015-0952-9.html
   My bibliography  Save this article

The market price of credit risk and economic states

Author

Listed:
  • Klaus Grobys

    (University of Vaasa)

  • Jesper Haga

    (Hanken School of Economics)

Abstract

This paper proposes a market-wide credit risk factor for the US stock market and investigates its properties that are dependent on economic conditions. The market price of credit risk is found to be statistically significantly negative, supporting earlier studies. However, a sample-split analysis reveals that this negative payoff is nonexistent in a later subsample, indicating that the credit risk puzzle is based on temporary mispricing related to the earlier subsample. Further investigation shows that mispricing in the earlier period was mainly driven by positive payoffs of low credit risk firms, while high credit risk firms did not generate significant returns in any of the sub-periods.

Suggested Citation

  • Klaus Grobys & Jesper Haga, 2016. "The market price of credit risk and economic states," Empirical Economics, Springer, vol. 50(3), pages 1111-1134, May.
    • Handle: RePEc:spr:empeco:v:50:y:2016:i:3:d:10.1007_s00181-015-0952-9
    DOI: 10.1007/s00181-015-0952-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-015-0952-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00181-015-0952-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John M. Griffin & Michael L. Lemmon, 2002. "Book‐to‐Market Equity, Distress Risk, and Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2317-2336, October.
    2. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    3. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Lorenzo Garlappi & Tao Shu & Hong Yan, 2008. "Default Risk, Shareholder Advantage, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2743-2778, November.
    6. Schwert, G. William, 2003. "Anomalies and market efficiency," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 15, pages 939-974, Elsevier.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Edwin J. Elton & Martin J. Gruber & Deepak Agrawal & Christopher Mann, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    9. Eugene F. Fama & Kenneth R. French, 2008. "Dissecting Anomalies," Journal of Finance, American Finance Association, vol. 63(4), pages 1653-1678, August.
    10. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    11. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    12. repec:bla:jfinan:v:59:y:2004:i:2:p:831-868 is not listed on IDEAS
    13. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    14. Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2013. "Anomalies and financial distress," Journal of Financial Economics, Elsevier, vol. 108(1), pages 139-159.
    15. Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2012. "The World Price of Credit Risk," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(2), pages 112-152.
    16. Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2009. "Credit ratings and the cross-section of stock returns," Journal of Financial Markets, Elsevier, vol. 12(3), pages 469-499, August.
    17. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    18. Jing-Zhi Huang & Ming Huang, 2012. "How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(2), pages 153-202.
    19. Nils Friewald & Christian Wagner & Josef Zechner, 2014. "The Cross-Section of Credit Risk Premia and Equity Returns," Journal of Finance, American Finance Association, vol. 69(6), pages 2419-2469, December.
    20. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    21. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    22. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    23. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    24. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    25. Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2007. "Momentum and Credit Rating," Journal of Finance, American Finance Association, vol. 62(5), pages 2503-2520, October.
    26. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    27. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2020. "Credit risk and financial integration: An application of network analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Deniz Anginer & Çelim Yıldızhan, 2018. "Is There a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross-section of Equity Returns [The risk-adjusted cost of financial distress]," Review of Finance, European Finance Association, vol. 22(2), pages 633-660.
    2. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, February.
    3. Assaf Eisdorfer & Efdal Ulas Misirli, 2020. "Distressed Stocks in Distressed Times," Management Science, INFORMS, vol. 66(6), pages 2452-2473, June.
    4. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Pricing default risk: The good, the bad, and the anomaly," Journal of Financial Stability, Elsevier, vol. 26(C), pages 190-213.
    5. Jean Helwege & Jing-Zhi Huang & Yuan Wang, 2017. "Debt Covenants and Cross-Sectional Equity Returns," Management Science, INFORMS, vol. 63(6), pages 1835-1854, June.
    6. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    7. Li, Tangrong & Lin, Hui, 2021. "Credit risk and equity returns in China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 588-613.
    8. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    9. Zaremba, Adam & Karathanasopoulos, Andreas & Maydybura, Alina & Czapkiewicz, Anna & Bagheri, Noushin, 2020. "Dissecting anomalies in Islamic stocks: Integrated or segmented pricing?," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    10. Andreou, Christoforos K. & Lambertides, Neophytos & Panayides, Photis M., 2021. "Distress risk anomaly and misvaluation," The British Accounting Review, Elsevier, vol. 53(5).
    11. de Groot, Wilma & Huij, Joop, 2018. "Are the Fama-French factors really compensation for distress risk?," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 50-69.
    12. Doron Avramov & Tarun Chordia & Gergana Jostova & Alexander Philipov, 2022. "The Distress Anomaly is Deeper than You Think: Evidence from Stocks and Bonds [The prediction of corporate bankruptcy: a discriminant analysis]," Review of Finance, European Finance Association, vol. 26(2), pages 355-405.
    13. Michael S. O'Doherty, 2012. "On the Conditional Risk and Performance of Financially Distressed Stocks," Management Science, INFORMS, vol. 58(8), pages 1502-1520, August.
    14. Jang, Jeewon & Kang, Jangkoo, 2019. "Probability of price crashes, rational speculative bubbles, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 132(1), pages 222-247.
    15. Yinxia G. Nielsen , Caren, 2013. "Is Default Risk Priced in Equity Returns?," Knut Wicksell Working Paper Series 2013/2, Lund University, Knut Wicksell Centre for Financial Studies.
    16. Jianfu Shen, 2021. "Distress Risk and Stock Returns on Equity REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 455-480, April.
    17. Venmans, Frank, 2021. "The leverage anomaly in U.S. bank stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    18. Pätäri, Eero & Karell, Ville & Luukka, Pasi & Yeomans, Julian S, 2018. "Comparison of the multicriteria decision-making methods for equity portfolio selection: The U.S. evidence," European Journal of Operational Research, Elsevier, vol. 265(2), pages 655-672.
    19. Guo, Hui & Jiang, Xiaowen, 2021. "Aggregate Distress Risk and Equity Returns," Journal of Banking & Finance, Elsevier, vol. 133(C).
    20. Zhu, Zhaobo & Duan, Xinrui & Sun, Licheng & Tu, Jun, 2019. "Momentum and reversal: The role of short selling," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 95-110.

    More about this item

    Keywords

    Asset pricing; Credit rating; Credit risk; Economic states; Business cycle; Market price of credit risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:50:y:2016:i:3:d:10.1007_s00181-015-0952-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.