Friewald, Nils, Wagner, Christian, Zechner, Josef. 2014. The Cross-Section of Credit Risk Premia and Equity Returns. Journal of Finance 69 (6), 2419-2469.
BibTeX
Abstract
We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton (1974): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk-neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.
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Status of publication | Published |
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Affiliation | WU |
Type of publication | Journal article |
Journal | Journal of Finance |
Citation Index | SSCI |
WU Journalrating 2009 | A+ |
Starjournal | Y |
Language | English |
Title | The Cross-Section of Credit Risk Premia and Equity Returns |
Volume | 69 |
Number | 6 |
Year | 2014 |
Page from | 2419 |
Page to | 2469 |
Reviewed? | Y |
DOI | http://dx.doi.org/10.1111/jofi.12143 |
Associations
- People
- Friewald, Nils (Former researcher)
- Wagner, Christian (Details)
- Zechner, Josef (Details)
- Organization
- Institute for Finance, Banking and Insurance IN (Details)