EIF Working Paper 2014/23 - Pricing Default Risk: The good, the bad, and the anomaly

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    Release date: 05 June 2014

Research & Market Analysis has the pleasure to present Pricing Default Risk: The good, the bad, and the anomaly.

This analysis is based on a cooperation between the EIF and the University of Luxembourg/Luxembourg School of Finance and it is the second paper published under this project. While empirical literature has documented a negative relation between default risk and stock returns, the theory suggests that default risk should be positively priced. The researchers provide an explanation for this “default anomaly”, by calculating monthly probabilities of default (PDs) for a large sample of firms and decomposing them into systematic and idiosyncratic components. The systematic part, measured as the PD sensitivity to aggregate default risk, is positively related to stock returns. The results show that riskier stocks underperform because they have on average lower exposures to aggregate default risk. Those readers of the EIF Working Papers with a more specific interest in quantitative financial research should be particularly interested by the technical results of this study.

The EIF Working Paper Series has been designed to make available to a wider readership selected topics and studies in relation to EIF´s business. The Working Papers are edited by EIF´s RMA. They are typically authored or co-authored by EIF staff and are usually published only electronically. 

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For more information contact:

Helmut Krämer-Eis

Head of EIF’s Research & Market Analysis

E-mail: h.kraemer-eis@eif.org

Tel.: (+352) 2485 81394


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