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Returns to Defaulted Corporate Bonds

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  • Thorsell, Håkan

    () (Dept. of Business Administration, Stockholm School of Economics)

Abstract

I test for short term excess return in a sample of 279 defaulted US corporate bonds using multiple regression analysis. There are robust excess returns after controlling for market and liquidity risk. The expected recovery rate during 2001-2006 is estimated to be, on average, four percentage points lower the first month after default than the present value of the recovery rate after nine months.

Suggested Citation

  • Thorsell, Håkan, 2009. "Returns to Defaulted Corporate Bonds," SSE/EFI Working Paper Series in Business Administration 2009:7, Stockholm School of Economics.
  • Handle: RePEc:hhb:hastba:2009_007
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
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    4. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    5. Weinstein, Mark, 1981. "The Systematic Risk of Corporate Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 257-278, September.
    6. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    7. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    8. Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," SSE/EFI Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 07 Jan 2003.
    9. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, February.
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    Keywords

    Bond pricing; Recovery rate;

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