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| Tekijä: | Kapadia, N. |
| Otsikko: | Tracking down distress risk |
| Lehti: | Journal of Financial Economics
2011 : OCT, VOL 102:1 p.167-182 |
| Asiasana: | bankruptcy risk business failures hedging |
| Vapaa asiasana: | distress risk risk factors |
| Kieli: | eng |
| Tiivistelmä: | It is shown here that exposure to aggregate distress risk is the underlying source of the premiums for the Fama-French size (SMB) and value (HML) factors. Utilizing a unique data set of aggregate business failures of both private and public firms from 1926 to 1997, portfolios tracking news about future firm failures are built. These tracking portfolios optimally hedge aggregate distress risk while attaining a CAPM alpha of approximately −4% a year. Both HML and SMB forecast changes in future failure rates. Small stocks have lower returns than large ones and value stocks have lower returns than growth ones whenever the market expects the future failure rates to increase. Lastly, a two-factor model with the market and the tracking portfolio for aggregate distress as factors does as well as the Fama-French three-factor model in pricing the 25 size and book-to-market sorted portfolios. |
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