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Default risk, systematic risk and Thai firms before, during and after the Asian crisis

  • Bystrom, Hans
  • Worasinchai, Lugkana
  • Chongsithipol, Srisuda

This paper applies the Merton (1974) default probability model to the firms in the SET-50 index at the Stock Exchange of Thailand (SET). It also examines the rela- tionship between a firm's default probability and firm-specific characteristics like size and book-to-market ratio, and whether default risk is systematic or not. We believe this to be the first paper dealing with these issues using data from an emerging country. The study also differs from other studies by dealing with how the default risk of firms in different sec- tors of the economy changes during a severe crisis. Overall, we find a significant increase in market based default probabilities around the crisis and a fairly slow return to pre-crisis levels. The first sector to suffer a deterioration in creditworthiness was the sector of finance and securities firms and the worst effected sector at the peak of the Asian crisis was the building materials sector. There are further some indications of the most distressed firms being on average somewhat smaller than the least distressed, but only during the crisis. We do not find significant evidence of the book-to-market ratio being related to the default risk in this particular market, though. Finally, if default risk is systematic, one would expect that default risk is rewarded by higher returns. However, in this sample the level of default risk of a firm does not seem to be able to explain the firm's subsequent realized returns at different horizons. We therefore reject the hypothesis that default risk is systematic.

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Article provided by Elsevier in its journal Research in International Business and Finance.

Volume (Year): 19 (2005)
Issue (Month): 1 (March)
Pages: 95-110

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Handle: RePEc:eee:riibaf:v:19:y:2005:i:1:p:95-110
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  1. Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(5), pages 419-438, December.
  2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
  3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
  5. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  6. Chan, K C & Chen, Nai-Fu, 1991. " Structural and Return Characteristics of Small and Large Firms," Journal of Finance, American Finance Association, vol. 46(4), pages 1467-84, September.
  7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  8. Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, 06.
  9. John M. Griffin & Michael L. Lemmon, 2002. "Book-to-Market Equity, Distress Risk, and Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2317-2336, October.
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