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The market price of credit risk and economic states

Author

Listed:
  • Klaus Grobys

    (University of Vaasa)

  • Jesper Haga

    (Hanken School of Economics)

Abstract

This paper proposes a market-wide credit risk factor for the US stock market and investigates its properties that are dependent on economic conditions. The market price of credit risk is found to be statistically significantly negative, supporting earlier studies. However, a sample-split analysis reveals that this negative payoff is nonexistent in a later subsample, indicating that the credit risk puzzle is based on temporary mispricing related to the earlier subsample. Further investigation shows that mispricing in the earlier period was mainly driven by positive payoffs of low credit risk firms, while high credit risk firms did not generate significant returns in any of the sub-periods.

Suggested Citation

  • Klaus Grobys & Jesper Haga, 2016. "The market price of credit risk and economic states," Empirical Economics, Springer, vol. 50(3), pages 1111-1134, May.
    • Handle: RePEc:spr:empeco:v:50:y:2016:i:3:d:10.1007_s00181-015-0952-9
    DOI: 10.1007/s00181-015-0952-9
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    Cited by:

    1. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2020. "Credit risk and financial integration: An application of network analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    Asset pricing; Credit rating; Credit risk; Economic states; Business cycle; Market price of credit risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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