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Credit risk – Return puzzle: Evidence from India

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  • Nedumparambil, Elizabeth
  • Bhandari, Anup Kumar

Abstract

Although asset pricing theories predict a positive relation between risk and returns, empirical findings on credit risk-return relationship are mixed. And, observed negative relation between the two in this regard is referred to as credit risk-return puzzle. Using credit rating as a measure of credit risk, we have investigated into the existence of this puzzle in India during July 2011 to March 2019. We have used information for the companies listed on the National Stock Exchange for this purpose. Our results validate the presence of this puzzle in the Indian stock market. Moreover, credit risk is observed to be a systematic risk, which has not been captured in the traditional asset pricing models. We have also observed partial evidence favoring both behavioural and rational pricing explanations—the two widely acknowledged explanations in the literature behind this puzzle. On our further query in this connection, we have not seen any significant change in the puzzle due to the recent enactment of the Insolvency and Bankruptcy Code.

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  • Nedumparambil, Elizabeth & Bhandari, Anup Kumar, 2020. "Credit risk – Return puzzle: Evidence from India," Economic Modelling, Elsevier, vol. 92(C), pages 195-206.
    • Handle: RePEc:eee:ecmode:v:92:y:2020:i:c:p:195-206
    DOI: 10.1016/j.econmod.2019.12.021
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    More about this item

    Keywords

    Stock returns; Credit risk; Credit risk-return puzzle; Insolvency and bankruptcy code;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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