Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/176653
Authors: 
Ferreira Filipe, Sara
Grammatikos, Theoharry
Michala, Dimitra
Year of Publication: 
2014
Series/Report no.: 
EIF Working Paper 2014/23
Abstract: 
While empirical literature has documented a negative relation between default risk and stock returns, the theory suggests that default risk should be positively priced. We provide an explanation for this "default anomaly", by calculating monthly probabilities of default (PDs) for a large sample of firms and decomposing them into systematic and idiosyncratic components. The systematic part, measured as the PD sensitivity to aggregate default risk, is positively related to stock returns. Our results show that riskier stocks underperform because they have on average lower exposures to aggregate default risk.
Subjects: 
Default Risk
Merton model
Default Anomaly
Idiosyncratic Risk
JEL: 
G11
G12
G15
G33
Document Type: 
Working Paper
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