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Authors: ZOU QIQI
Keywords: Distress risk, Distance-to-default, Probability of default, Asset pricing tests, Liquidity, Trading noise
Issue Date: 14-Mar-2016
Citation: ZOU QIQI (2016-03-14). ESSAYS ON DISTRESS RISK. ScholarBank@NUS Repository.
Abstract: This thesis consists of two essays on corporate distress risk. The first essay aims to reconcile the ?distress premium puzzle? by employing a carefully refined measure that captures company distress levels more accurately. It is found that liquidity, proxied by a trading noise parameter, can distort asset pricing results through distress risk estimation, and that the existing academic debate between Vassalou and Xing (2004) and Da and Gao (2010) is somewhat artificial. Our results in fact suggest conclusively that financially distressed stocks do realize higher returns, and that this relationship cannot be simply dismissed by any short-term return reversal effect or other firm characteristics. The second essay documents that adjusting for trading noise has material impact on firms? DTD estimation. When calibrating trading-noise-adjusted DTD in reduced-form models along with other variables, the resulting default probabilities are shown to be more powerful in forecasting corporate default events, especially for illiquid firms.
Appears in Collections:Ph.D Theses (Open)

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