Default risk and equity returns: Australian evidence

Gharghori, Philip, Chan, Howard and Faff, Robert (2009) Default risk and equity returns: Australian evidence. Pacific-Basin Finance Journal, 17 5: 580-593. doi:10.1016/j.pacfin.2009.03.001

Author Gharghori, Philip
Chan, Howard
Faff, Robert
Title Default risk and equity returns: Australian evidence
Journal name Pacific-Basin Finance Journal   Check publisher's open access policy
ISSN 0927-538X
Publication date 2009-11
Sub-type Article (original research)
DOI 10.1016/j.pacfin.2009.03.001
Volume 17
Issue 5
Start page 580
End page 593
Total pages 14
Place of publication Amsterdam, Netherlands
Publisher Elsevier BV
Language eng
Abstract We test whether default risk is related to equity returns using the Fama and MacBeth [Fama, E.F., MacBeth, J., 1973. Risk, return, and equilibrium: empirical tests. Journal of Political Economy 81, 607-636.] regression framework. The proxy we use for default risk is the default probability obtained from option-based models. Our findings show that default probability is negatively related to returns. While we find that size and book-to-market are related to default risk, the ability of these variables to explain cross-sectional variation in returns is not because they are proxying default risk. Further, our evidence suggests that the negative relationship between default probability and returns is not due to a leverage, volatility or momentum effect. © 2009 Elsevier B.V. All rights reserved.
Keyword Default risk
Asset pricing
Fama–French model
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 9 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 12 times in Scopus Article | Citations
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Created: Thu, 03 Mar 2011, 15:19:26 EST by Karen Morgan on behalf of UQ Business School