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Search Results (5)

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Keywords = distress risk premium

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24 pages, 300 KiB  
Article
Financial Distress Premium or Discount? Some New Evidence
by Ramya R. Aroul, Noura K. Kone and Sanjiv Sabherwal
J. Risk Financial Manag. 2024, 17(7), 286; https://doi.org/10.3390/jrfm17070286 - 7 Jul 2024
Cited by 1 | Viewed by 1971
Abstract
This study investigates the contradiction in the finding of a positive distress risk premium in Vassalou and Xing’s study and the finding of a negative distress risk premium, i.e., a distress risk discount, in several other studies. Using the default likelihood measure calculated [...] Read more.
This study investigates the contradiction in the finding of a positive distress risk premium in Vassalou and Xing’s study and the finding of a negative distress risk premium, i.e., a distress risk discount, in several other studies. Using the default likelihood measure calculated following Vassalou and Xing’s procedure for 1965–2023, we show that excluding outliers and including the time period beyond the end of Vassalou and Xing’s sample period in 1999 makes a difference in the results. Overall, using portfolio sorting and Fama-MacBeth regressions, this study supports the existence of a distress risk discount. This study also documents that the financial distress risk is negatively reflected in security prices even after accounting for size and book-to-market risk factors. Furthermore, it demonstrates that the negative distress risk premium is strong and persistent across economic expansions, recessions, and the COVID-19 pandemic. Full article
(This article belongs to the Special Issue Bankruptcy Prediction, Equity Valuation and Stock Returns)
39 pages, 1866 KiB  
Article
Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020
by Mohammad Sharik Essa and Evangelos Giouvris
Int. J. Financial Stud. 2023, 11(1), 12; https://doi.org/10.3390/ijfs11010012 - 4 Jan 2023
Cited by 5 | Viewed by 3392
Abstract
The study investigates the impact of financial distress (credit spread) and liquidity crises (TED spread) on size, value, profitability, investment and momentum premiums within the US Real Estate Investment Trust market. Using daily data from 2001 to 2020, we examine the presence, magnitude [...] Read more.
The study investigates the impact of financial distress (credit spread) and liquidity crises (TED spread) on size, value, profitability, investment and momentum premiums within the US Real Estate Investment Trust market. Using daily data from 2001 to 2020, we examine the presence, magnitude and significance of these premiums, along with assessing if these premiums are associated with higher risk. The study then employs Auto-regressive distributed lag and Error Correction Modeling to establish the long/short-run impact of financial distress and liquidity crisis on these premiums during recessionary and non-recessionary phases, including COVID-19. Premiums associated with all five factors are positive and significant. Secondly, in contradiction to the Efficient Market Hypothesis, we find that value and momentum portfolios provide superior returns without exposing investors to higher risk while portfolios based on size, profitability and investment, do tend to expose investors to a higher risk. Thirdly, in contradiction to the risk based explanation of Fama–French/Carhart (2015/1997), we find significant evidence of a fall in profitability and momentum premiums with an uptick in financial distress and liquidity crisis. On the other hand, size, value and investment premiums rise with financial distress/liquidity crisis, only during the recessionary phases. This impact is insignificant during non-recessionary phases. Full article
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15 pages, 282 KiB  
Article
Determining Force behind Value Premium: The Case of Financial Leverage and Operating Leverage
by Hafiz Muhammad Zia ul haq, Muhammad Sohail Shafiq, Muhammad Kashif and Saba Ameer
J. Risk Financial Manag. 2020, 13(9), 196; https://doi.org/10.3390/jrfm13090196 - 2 Sep 2020
Cited by 3 | Viewed by 4282
Abstract
The determining force behind the value premium is the matter of debate among the researchers. Some are of the opinion that the financial distress risk determines value premium whereas other theorize that value premium is basically the compensation for operating leverage (investment activity [...] Read more.
The determining force behind the value premium is the matter of debate among the researchers. Some are of the opinion that the financial distress risk determines value premium whereas other theorize that value premium is basically the compensation for operating leverage (investment activity risk). This research provides empirical evidence on this theoretical contradiction by investigating the relationships of financial leverage (FL) and operating leverage (OL) with stock returns, the book to market ratio (B/M), and systematic risk on non-financial sector firms trading at the Pakistan stock exchange (PSE). This research empirically finds significant and direct influence of operating leverage on stock returns, the book to market ratio, and systematic risk respectively. Overall findings provide support for the theoretical models which have a linked book to market effect with operating leverage. Thus, we conclude that investment activity risk seems to be the major factor that determines value premium. Full article
(This article belongs to the Section Financial Markets)
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33 pages, 1596 KiB  
Article
A Quantitative Analysis of Risk Premia in the Corporate Bond Market
by Sara Cecchetti
J. Risk Financial Manag. 2020, 13(1), 3; https://doi.org/10.3390/jrfm13010003 - 20 Dec 2019
Cited by 2 | Viewed by 4542
Abstract
Measures of corporate credit risk incorporate compensation for unpredictable future changes in the credit environment and compensation for expected default losses. Since the launch of purchases of government securities and corporate securities by the European Central Bank, it has been discussed whether the [...] Read more.
Measures of corporate credit risk incorporate compensation for unpredictable future changes in the credit environment and compensation for expected default losses. Since the launch of purchases of government securities and corporate securities by the European Central Bank, it has been discussed whether the observed reduction in corporate credit risk was due to the decrease in risk aversion favored by the monetary easing or by expectations of lower losses due to corporate defaults. This work introduces a new methodology to break down the factors that drive corporate credit risk, namely the premium linked to cyclical and monetary conditions and that linked to the restructuring of the companies. Untangling these two components makes it possible to quantify the drivers of excess returns in the corporate bond market. Full article
(This article belongs to the Special Issue Corporate Debt)
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25 pages, 1634 KiB  
Article
Bail-In or Bail-Out? Correlation Networks to Measure the Systemic Implications of Bank Resolution
by Paolo Giudici and Laura Parisi
Risks 2019, 7(1), 3; https://doi.org/10.3390/risks7010003 - 5 Jan 2019
Cited by 5 | Viewed by 4088
Abstract
We propose a statistical measure, based on correlation networks, to evaluate the systemic risk that could arise from the resolution of a failing or likely-to-fail financial institution, under three alternative scenarios: liquidation, private recapitalization, or bail-in. The measure enhances the observed CDS spreads [...] Read more.
We propose a statistical measure, based on correlation networks, to evaluate the systemic risk that could arise from the resolution of a failing or likely-to-fail financial institution, under three alternative scenarios: liquidation, private recapitalization, or bail-in. The measure enhances the observed CDS spreads with a risk premium that derives from contagion effects across financial institutions. The empirical findings reveal that the recapitalization of a distressed bank performed by the other banks in the system and the bail-in resolution minimize the potential losses for the banking sector with respect to the liquidation scenario, thus posing limited systemic risks. A closer comparison between the private intervention recapitalization and the bail-in tool shows that the latter slightly reduces contagion effects with respect to the private intervention scenario. Full article
(This article belongs to the Special Issue Model Risk in Finance)
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