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The Effect of Systematic Default Risk on Credit Risk Premiums

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  • Jungmu Kim

    (Department of Business Administration, College of Business, Yeungnam University, Gyeongsan 38541, Korea)

Abstract

This study examines whether systematic default risks affect a cross section of credit risk premiums. Using a structural framework, I derive a theoretical cross-sectional relationship, develop a testable hypothesis, and provide a method to estimate the systematic default risk. The empirical results of US corporate credit default swap data are consistent with my hypothesis. The findings show that, while credit market factors have positive effects on a cross section of credit risk premiums, stock market factors have a negative impact. Regression analyses reveal that the market’s average default probability and the value factor have a significant effect on the credit risk premium. In addition, credit market factors are more influential than equity market factors as systematic default risk factors. The results suggest that systematic and idiosyncratic default risks are priced differently in a cross section of credit risk premiums.

Suggested Citation

  • Jungmu Kim, 2019. "The Effect of Systematic Default Risk on Credit Risk Premiums," Sustainability, MDPI, vol. 11(21), pages 1-17, October.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:21:p:6039-:d:281911
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