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Hidden in the Factors? The Effect of Credit Risk on the Cross-section of Equity Returns

This paper disentangles the complexity of the distress risk premium in stock returns using the risk-neutral measure of credit risk (valued by CDS spread) and investigates the relationship between credit risk and the market , size, value, and momentum effects. Consistent with the argument for a negative distress premium, firms with higher credit risk have lower stock returns, and a positive value effect is concentrated in high credit quality firms. However, credit risk is positively priced in returns on stocks that won the most in the past year and that, during crisis, co-moved the most with the market. A positive momentum effect is concentrated in high credit risk firms. Furthermore, the size effect, but not the value effect, could be attributed to a positive credit risk effect.

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File URL: http://project.nek.lu.se/publications/workpap/papers/WP11_38.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2011:38.

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Length: 24 pages
Date of creation: 04 Nov 2011
Date of revision: 01 Oct 2016
Handle: RePEc:hhs:lunewp:2011_038
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Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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