Stock returns and default risk: Evidence from the Taiwan market

• Main Authors: Dian-Hung Yu, 余典虹
• Other Authors: Jun-Biao Lin
• Format: Others
• Language: en_US
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/45963230006417583085

碩士 === 國立高雄第一科技大學 === 金融理財研究所 === 98 === There have been interests in understanding the relation between default risk and equity returns in the finance literature. Recent work by Vassalou and Xing (2004) suggests default as possibly providing a risk-based explanation for the size and book-to-market premium in the US market from 1970 to 1999. However, research which has empirically documented the link between default risk and each of two effects is scant in the Taiwan market. Therefore, the aim of this article attempts to explore whether default effect exists in the Taiwan market by using a classical structural model of default due to Merton (1974) to estimate a firm’s “distance to default”. Results of this study showed that default effect is observed only in bull markets and seems to disappear in bear markets. The empirical evidence suggests that high default risk stocks underperform in bearish periods whereas in our sample small stocks and value stocks outperform.