Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices

This paper finds that systematic default risk, or the event of widespread defaults in the corporate sector, is an important determinant of equity returns. Moreover, the market price of systematic default risk is one order of magnitude higher than the market price of other risk factors. In contrast to studies by Fama and French (1993, 1996 ) and Vassalou and Xing (2004), this paper uses a market-based measure of systematic default risk. The measure is constructed using price information from credit derivatives prices, namely the spreads of standardized single-tranche collateralized debt obligations on credit derivatives indices.Credit risk;Credit tranches;credit derivatives, equity returns, bond, hedge funds, equity prices, bonds, equity markets, derivatives markets, financial markets, derivative, hedge, financial economics, derivatives instruments, credit derivative, corporate bond, stock shares, bond yields, capital asset, stock market, corporate bond issuers, bond issuers, mature markets, credit market, stock returns, stock market crash, financial systems, capital structure, stock portfolios, equity risk premium, derivatives market, present value, discounting