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Korean Journal of Financial Studies 2011;40(2):377-403.
Published online April 30, 2011.
Default Risk and Equity Return
Sae Kwon Kim, Kee Hwan Park
부도위험과 주식수익률
김세권, 박기환
Abstract
In this paper, we study the relation between the default risk of a firm and its equity return in the Korean stock market and relate the default effect to the Fama-French size and book-to-market effects. We measure the default probability of a firm based on the Merton`s (1974) option model for the contingent claims. We find that the return for a high-default risk firm is economically and statistically higher than that for a low-default risk firm and the default effect is intimately connected with the Fama-French factors. In order to carefully examine the relationships, we conduct both the cross-sectional and time-series analyses. The cross-sectional analysis relys on the Fama-MacBeth cross-sectional analysis (1973), and the time-series analysis on the Ludvigson and Ng (2007) principal component analysis for the stock returns. The results indicate that the default risk strongly proxies the book-to-market effect, while the size effect carries an important information independent of the default risk factor. We compare our results vis-a-vis the result obtained by Vassalou and Xing (2004) which studied the default risk effect on the equity return in the U.S. market. Finally, we discuss its implications for the equilibrium models such as Merton`s (1973) intertemporal CAPM.
Key Words: 규모효과,부도위험,주성분 분석,주식수익률,BM 효과,BM Effect,Defaul Risk,Pricipal Commponent Analysis,Size Effect,Stock Return
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