Topic: Aggregate Distress Risk is Priced with a Positive Premium
Presenter：Prof. Hui Guo，Associate Professor of Finance, University of Cincinnati
Time: November 26, 2010（Friday）10:00—11:30AM
Venue: Room 501, Jiageng Bld 2
Chair： Jun Ruan, assistant professor in finance, IFAS
Abstract：
Using Campbell, Hilscher, and Szilagyi’s (2008) defaultprobability measure, we show in three ways that investors require a positive premium for bearing systematic distress risk. First, aggregate default probability correlates positively with future excess market returns when we control for other determinants of conditional equity premium. Second, portfolios whose returns have large loadings on lagged aggregate default probability earn higher expected returns than do portfolios with small loadings. Lastly, if a stock provides a poor hedge against distress risk (i.e., its return has a strong negative covariance with changes in aggregate default probability), it tends to have high future returns, ceteris paribus. We show that the puzzling negative default probability-return relation documented in earlier studies reflects the fact that the default probability is a poor measure of exposure to aggregate distress risk.
Presenter Introduction：
Prof. Hui Guo is Associate Professor of Finance from University of Cincinnati. He got his Ph.D. in Financial Economics, M.A. in Economics and B.S. in Economics from New York University, University of New Hampshire, and Wuhan University respectively.
Download：H Guo distress risk.pdf