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The Default Risk Puzzle - Evidence from the Swedish market

Söderlind, Mia-Melina LU and Selin, Sara LU (2019) NEKN02 20191
Department of Economics
Abstract
Default risk is a major source of potential losses to equity investors and the effect of default risk on stock returns have therefore been widely examined by several papers. However, whether there exists an anomalous significant relationship between default risk and stock returns is a rather unexplored subject on the Swedish market. This paper is therefore analyzing 436 firms on the Swedish market between 1993-2016. A multifactor model including size and book-to-market factors derived from Fama and French (1993) and a constructed factor based on default risk is analyzed against excess stock returns. For statistical testing of whether default risk is systematic or not, Fama and MacBeth (1973) two-step regression is performed. The results... (More)
Default risk is a major source of potential losses to equity investors and the effect of default risk on stock returns have therefore been widely examined by several papers. However, whether there exists an anomalous significant relationship between default risk and stock returns is a rather unexplored subject on the Swedish market. This paper is therefore analyzing 436 firms on the Swedish market between 1993-2016. A multifactor model including size and book-to-market factors derived from Fama and French (1993) and a constructed factor based on default risk is analyzed against excess stock returns. For statistical testing of whether default risk is systematic or not, Fama and MacBeth (1973) two-step regression is performed. The results indicate that default risk is systematic and that there is a negative relationship between default risk and stock return, implying that less risk generates higher returns. The default risk puzzle is thereby present at the Swedish market. (Less)
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author
Söderlind, Mia-Melina LU and Selin, Sara LU
supervisor
organization
course
NEKN02 20191
year
type
H1 - Master's Degree (One Year)
subject
keywords
Default risk, Altman's Z"-score, Systematic risk, Fama-MacBeth two-step regression, Stockholm Exchange
language
English
id
8984470
date added to LUP
2019-08-08 10:28:44
date last changed
2019-08-08 10:28:44
@misc{8984470,
  abstract     = {{Default risk is a major source of potential losses to equity investors and the effect of default risk on stock returns have therefore been widely examined by several papers. However, whether there exists an anomalous significant relationship between default risk and stock returns is a rather unexplored subject on the Swedish market. This paper is therefore analyzing 436 firms on the Swedish market between 1993-2016. A multifactor model including size and book-to-market factors derived from Fama and French (1993) and a constructed factor based on default risk is analyzed against excess stock returns. For statistical testing of whether default risk is systematic or not, Fama and MacBeth (1973) two-step regression is performed. The results indicate that default risk is systematic and that there is a negative relationship between default risk and stock return, implying that less risk generates higher returns. The default risk puzzle is thereby present at the Swedish market.}},
  author       = {{Söderlind, Mia-Melina and Selin, Sara}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Default Risk Puzzle - Evidence from the Swedish market}},
  year         = {{2019}},
}