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Default Risk Premia and Asset Returns

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  • Antje Berndt
  • Aziz Lookman
  • Iulian Obreja

Abstract

We identify a common default risk premia (DRP) factor in the risk-adjusted excess returns on pure default-contingent claims. Asset pricing tests using almost 50 corporate bond portfolios sorted on rating, maturity or industry suggest that the DRP factor is priced in the corporate bond market. For index put option portfolios sorted on maturity and moneyness, both average returns and DRP beta estimates become more negative with decreasing time to maturity. There is little to no evidence of the DRP factor being priced in equity markets. Most of the variation in DRP is explained by the portion DRP^{JtD} due to common jump-to-default risk premia. A theoretical framework where DRP^{JtD} is part of the pricing kernel supports our empirical findings.

Suggested Citation

  • Antje Berndt & Aziz Lookman & Iulian Obreja, "undated". "Default Risk Premia and Asset Returns," GSIA Working Papers 2006-E21, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1142550977
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    File URL: https://student-3k.tepper.cmu.edu/gsiadoc/wp/2006-E21.pdf
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