Do Stock Returns Really Decrease With Default Risk? New International Evidence ☆

This study constructs a unique dataset of bankruptcy filings for a large sample of non-U.S. firms in 14 developed markets and sheds new light on the cross-sectional relation between default risk and stock returns. Using the flexible approach of Campbell et al. (2008) to estimate default risk probabilities, this is the first study to offer conclusive evidence supporting the existence of a significantly positive default risk premium in international markets, in both economic and statistical terms. This finding is robust to different portfolio weighting schemes, data filters, sample periods and holding period definitions, and holds using both in-sample estimates of default probabilities during the period 1992-2010 and out-of-sample estimates during the period 2000-2010. We also show tha