Distress risk anomaly during market crises
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School of Business |
Bachelor's thesis
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Authors
Date
2021
Department
Major/Subject
Mcode
Degree programme
Rahoitus
Language
en
Pages
18+3
Series
Abstract
I study the relationship between distress risk and returns during market crises. I find that over a period from 1973 to 2020 this relationship is negative, which is why it is called the distress risk anomaly. However, during market crises, this relationship reverses completely and becomes positive. This finding indicates that the anomaly is driven by systematic default risk as it is elevated during times of crisis. Only the systematic portion of total default risk is compensated with higher returns. Thus the negative relationship between distress risk and returns over a long period is likely due to the inability to capture systematic default risk.Description
Thesis advisor
Kokkonen, JoniKeywords
distress risk anomaly, systematic default risk, high-yield spreads, distress risk