Default risk and equity returns:Evidence form Taiwan market

• Main Author: 陳哲民
• Other Authors: 李漢星
• Format: Others
• Language: en_US
• Published: 2011
• Online Access: http://ndltd.ncl.edu.tw/handle/49111894069006633760

碩士 === 國立交通大學 === 管理科學系所 === 99 === Do high default risk firms earn higher returns than low default risk firms in Taiwan? Our paper examines the relation between default risk and equity returns controlled by size effect, book-to-market effect, and liquidity effect. In addition, we also examine if there exists short-term return reversal phenomenon, and perform asset pricing test. Three models are applied to measure default risk: the Merton’s (1974) distance to default (DD) model, the Naïve Merton model (Bharath and Shumway 2008), and the Hazard model (Shumway 2001). The empirical results show that in Taiwan equity market, short-term return reversal of high default risk portfolio exists only for analysis of raw returns, but not for risk-adjusted returns. Our results also indicate that default risk alone has some power in explaining equity returns. However, default risk does not contain additional important price information uncorrelated to existing three or four risk factor models.