Can Default Risk Influence Equity Returns?

The generalized credit risk can be defined as when the company encounters financial difficulties or causes some default events as a counterparty,which may lead to the compay’s bankruptcy.Quite a number of studies have focused on the estimate of the default risk of corporate bonds and their derivative products both in China and abroad,but they paid little attention to the relationship between the credit risk and the stock returns.As a result,the main purpose of this paper is to find the better way of measure the credit risk of listed companies,and study whether if the credit risk will affect the returns of stocks.The samples of this paper is the listed companies of China’s A-stock market between January 2007 and December 2016,and use KMV model to calculate every single company’s monthly probability of default to measure their credit risk.Then using two-dimensional grouping method to invesigate the relationship between the credit risk and the returns of stock.In the end,add "credit risk factor" to the CAPM model,Fama-French three factor model and Carhatt four factor model,to test whether the credit risk is an important systematic factors which can help asset pricing.The empirical results indicate that:(1)China’s stock market exists obvious"credit risk effect",the higher the risk of default,the lower the yield will be,and the lower the risk of default,the higher the returns will be.(2)There’s a relationship between credit risk faccor and size/BM factor.Characterized by increased with the increase of the scale,the credit risk will reduce,and credit risk is negatively related to the book value ratio.(3)The book vale ratio and size factor contains some information part of the credit risk.(4)Credit risk is systemic risk,and can help asset pricing.This paper provides the methods in credit risk measurement,and go into lucubrate the multi-factors pricing models,and give some revelations in the pricing of listed companies equity returns.