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Credit risk and stock return - An investigation of the credit risk premium

Melander Norinder, Axel LU and Svensson, Magnus LU (2018) NEKN02 20181
Department of Economics
Abstract
Several researchers have investigated the relationship between credit risk and stock returns, but their findings are ambiguous. While some have found the anomalous relationship that investors pay a negative risk premium when investing in high credit risk stocks, others have presented opposing results. This non-consensus and intriguing results motivated us to further investigate this relationship by examining the returns of approximately 8000 stocks in the U.S. during the period 2007-2017. To find if there is an anomalous relationship we used a multi-factor model incorporating market excess return and the firm-specific factors; size, value and credit ratings. Our results indicate that credit ratings can be used to explain stock return and... (More)
Several researchers have investigated the relationship between credit risk and stock returns, but their findings are ambiguous. While some have found the anomalous relationship that investors pay a negative risk premium when investing in high credit risk stocks, others have presented opposing results. This non-consensus and intriguing results motivated us to further investigate this relationship by examining the returns of approximately 8000 stocks in the U.S. during the period 2007-2017. To find if there is an anomalous relationship we used a multi-factor model incorporating market excess return and the firm-specific factors; size, value and credit ratings. Our results indicate that credit ratings can be used to explain stock return and that there is a positive relationship between the credit risk and stock return. (Less)
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author
Melander Norinder, Axel LU and Svensson, Magnus LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
credit rating, credit risk, U.S. market, stock returns, risk premiuml
language
English
id
8948373
date added to LUP
2018-07-02 15:41:01
date last changed
2018-07-02 15:41:01
@misc{8948373,
  abstract     = {Several researchers have investigated the relationship between credit risk and stock returns, but their findings are ambiguous. While some have found the anomalous relationship that investors pay a negative risk premium when investing in high credit risk stocks, others have presented opposing results. This non-consensus and intriguing results motivated us to further investigate this relationship by examining the returns of approximately 8000 stocks in the U.S. during the period 2007-2017. To find if there is an anomalous relationship we used a multi-factor model incorporating market excess return and the firm-specific factors; size, value and credit ratings. Our results indicate that credit ratings can be used to explain stock return and that there is a positive relationship between the credit risk and stock return.},
  author       = {Melander Norinder, Axel and Svensson, Magnus},
  keyword      = {credit rating,credit risk,U.S. market,stock returns,risk premiuml},
  language     = {eng},
  note         = {Student Paper},
  title        = {Credit risk and stock return - An investigation of the credit risk premium},
  year         = {2018},
}