Are the Fama-French factors proxying default risk?

Ghaghori, Philip, Chan, Howard and Faff, Robert (2007) Are the Fama-French factors proxying default risk?. Australian Journal of Management, 32 2: 223-249.

Author Ghaghori, Philip
Chan, Howard
Faff, Robert
Title Are the Fama-French factors proxying default risk?
Journal name Australian Journal of Management   Check publisher's open access policy
ISSN 1327-2020
0312-8962
Publication date 2007-12
Sub-type Article (original research)
Volume 32
Issue 2
Start page 223
End page 249
Total pages 27
Place of publication London, United Kingdom
Publisher Sage Publications
Language eng
Abstract In this paper we investigate the contention that the Fama-French (1993) model's ability to explain cross-sectional variation in equity returns occurs because the Fama-French factors, SMB and HML, are proxying for default risk. To assess the default risk hypothesis, we augment the CAPM and the Fama-French model with a default factor and run system regressions of the default enhanced models using the GMM approach. Our key findings are that: 1) default risk is not priced in equity returns; and, 2) the Fama-French factors are not proxying for default risk. Although our findings suggest that SMB and HML are not proxying for default risk, our analysis indicates that the Fama-French factors are capturing some form of priced risk. However, what type of risk the Fama-French factors are capturing remains an open question.
Keyword Fama-French model
Default risk
Asset pricing
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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Created: Fri, 04 Mar 2011, 11:59:38 EST by Karen Morgan on behalf of UQ Business School