Default Risk, Liquidity Risk, and Equity Returns: Evidence from the Taiwan Market

The authors' empirical results indicate that default risk has some power to explain equity returns on the Taiwanese stock market, but it does not contain other important price information uncorrelated with the prevailing three or four risk factor models. Furthermore, compared to the U.S. market...

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Bibliographic Details
Published in:Emerging markets finance & trade 2013-01, Vol.49 (1), p.101-129
Main Authors: Chen, Che-Min, Lee, Han-Hsing
Format: Article
Language:English
Subjects:
book-to-market effect
Default
default risk
Liquidity
Market timing
Merton model
Return on equity
return reversal
Risk factors
Securities markets
Studies
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Summary:The authors' empirical results indicate that default risk has some power to explain equity returns on the Taiwanese stock market, but it does not contain other important price information uncorrelated with the prevailing three or four risk factor models. Furthermore, compared to the U.S. market, the timing of distress returns is different. The short-term return reversal in the first month is less pronounced for the return differential between portfolios having high and low default risk, but the reversal lingers for a longer period of time. Overall, the book-to-market ratio, rather than the liquidity effect, plays a crucial role in explaining the default risk in equity returns.
ISSN:1540-496X
1558-0938
DOI:10.2753/REE1540-496X490106