Default risk, liquidity risk, and equity returns: Evidence from the Taiwan market

Che Min Chen, Han-Hsing Lee

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)101-129
Number of pages29
JournalEmerging Markets Finance and Trade
Volume49
Issue number1
DOIs
StatePublished - 1 Jan 2013

Keywords

  • Merton model
  • book-to-market effect
  • default risk
  • liquidity
  • return reversal

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