Journal of Financial Economics Vol. 149 No. 3 2023
Systematic default and return predictability in the stock and bond markets
open access
Abstract
We construct a measure of systematic default defined as the probability that many firms default at the same time. We account for correlations in defaults between firms through exposures to common shocks. Systematic default spikes during recessions, is correlated with macroeconomic indicators, and predicts future realized defaults. More importantly, it predicts future equity and corporate bond index returns both in- and out-of-sample. Finally, we find that the cross-section of average stock returns is related to firm-level exposures to systematic default risk.
- DOI
- 10.1016/j.jfineco.2023.05.006
- Volume
- 149
- Issue
- 3
- Pages
- 349-377
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref