IDEAS home Printed from https://ideas.repec.org/p/hhb/hastba/2009_007.html
   My bibliography  Save this paper

Returns to Defaulted Corporate Bonds

Author

Listed:
  • Thorsell, Håkan

    (Dept. of Business Administration, Stockholm School of Economics)

Abstract

I test for short term excess return in a sample of 279 defaulted US corporate bonds using multiple regression analysis. There are robust excess returns after controlling for market and liquidity risk. The expected recovery rate during 2001-2006 is estimated to be, on average, four percentage points lower the first month after default than the present value of the recovery rate after nine months.

Suggested Citation

  • Thorsell, Håkan, 2009. "Returns to Defaulted Corporate Bonds," SSE/EFI Working Paper Series in Business Administration 2009:7, Stockholm School of Economics.
  • Handle: RePEc:hhb:hastba:2009_007
    as

    Download full text from publisher

    File URL: http://swoba.hhs.se/hastba/papers/hastba2009_007.pdf
    File Function: Complete Rendering
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. Paul Asquith & Robert Gertner & David Scharfstein, 1994. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 625-658.
    4. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    5. repec:bla:ecnote:v:32:y:2003:i:2:p:147-176 is not listed on IDEAS
    6. Weinstein, Mark, 1981. "The Systematic Risk of Corporate Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(3), pages 257-278, September.
    7. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    8. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    9. Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," SSE/EFI Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 07 Jan 2003.
    10. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, February.
    Full references (including those not matched with items on IDEAS)

    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. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    2. Lin, Hai & Wang, Junbo & Wu, Chunchi, 2011. "Liquidity risk and expected corporate bond returns," Journal of Financial Economics, Elsevier, vol. 99(3), pages 628-650, March.
    3. Gregory Connor & Lisa R. Goldberg & Robert A. Korajczyk, 2010. "Portfolio Risk Analysis," Economics Books, Princeton University Press, edition 1, number 9224.
    4. Karstanje, Dennis & Sojli, Elvira & Tham, Wing Wah & van der Wel, Michel, 2013. "Economic valuation of liquidity timing," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5073-5087.
    5. Ho, Tsung-wu & Chang, Shu-Hwa, 2015. "The pricing of liquidity risk on the Shanghai stock market," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 112-130.
    6. Shafiqur Rahman & Matthew J. Schneider, 2019. "Tests of Alternative Asset Pricing Models Using Individual Security Returns and a New Multivariate F-Test," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-34, March.
    7. De Moor, Lieven & Sercu, Piet, 2013. "The smallest firm effect: An international study," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 129-155.
    8. Kim, Soon-Ho & Lee, Kuan-Hui, 2014. "Pricing of liquidity risks: Evidence from multiple liquidity measures," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 112-133.
    9. Alquist, Ron, 2010. "How important is liquidity risk for sovereign bond risk premia? Evidence from the London stock exchange," Journal of International Economics, Elsevier, vol. 82(2), pages 219-229, November.
    10. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    11. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    12. Chabi-Yo, Fousseni & Ruenzi, Stefan & Weigert, Florian, 2018. "Crash Sensitivity and the Cross Section of Expected Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(3), pages 1059-1100, June.
    13. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January.
    14. 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.
    15. Ben-Rephael, Azi & Kadan, Ohad & Wohl, Avi, 2008. "The diminishing liquidity premium," CFS Working Paper Series 2008/52, Center for Financial Studies (CFS).
    16. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2007. "Liquidity and Expected Returns: Lessons from Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1783-1831, November.
    17. Gehrig, Thomas & Fohlin, Caroline & Haas, Marlene, 2015. "Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907," CEPR Discussion Papers 10497, C.E.P.R. Discussion Papers.
    18. de Jong, F.C.J.M. & Driessen, J.J.A.G., 2015. "Can large long-term investors capture illiquidity premiums," Other publications TiSEM 9c92b978-0099-44d3-9aab-8, Tilburg University, School of Economics and Management.
    19. Tarun Chordia & Jianfeng Hu & Avanidhar Subrahmanyam & Qing Tong, 2019. "Order Flow Volatility and Equity Costs of Capital," Management Science, INFORMS, vol. 65(4), pages 1520-1551, April.
    20. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.

    More about this item

    Keywords

    Bond pricing; Recovery rate;

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:hhb:hastba:2009_007. 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: Helena Lundin (email available below). General contact details of provider: https://edirc.repec.org/data/erhhsse.html .

    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.