The credit risk-return puzzle: Impact of credit rating announcements in Australia and Japan

Bissoondoyal-Bheenick, E and Brooks, R 2015, 'The credit risk-return puzzle: Impact of credit rating announcements in Australia and Japan', Pacific Basin Finance Journal, vol. 35, pp. 37-55.


Document type: Journal Article
Collection: Journal Articles

Title The credit risk-return puzzle: Impact of credit rating announcements in Australia and Japan
Author(s) Bissoondoyal-Bheenick, E
Brooks, R
Year 2015
Journal name Pacific Basin Finance Journal
Volume number 35
Start page 37
End page 55
Total pages 19
Publisher Elsevier BV
Abstract Traditional asset pricing models postulate that high risk investments are usually associated with higher returns. However, this does not hold in the relationship between credit risk and return. There is a known credit risk-return puzzle, which highlights a negative relationship between credit risk and the stock market returns. The objective of this study is to assess the puzzling credit risk-return relationship of stocks; in particular, comparing the stock returns of high versus low credit risk firms, as measured by credit ratings from Standard and Poor's in Australia and Japan for a period from January 1990 to June 2012. Our results indicate that the credit risk-return puzzle exists in both Japan and Australia. However, it seems that the credit risk-return anomaly is explained by the downgrade announcements in the market and hence we conclude that downgrade announcements of a firm have a significant impact on the cross section of returns.
Subject Finance
Keyword(s) Credit ratings
Credit risk-return puzzle
Downgrades
Economic cycles
DOI - identifier 10.1016/j.pacfin.2014.09.001
Copyright notice © 2014 Elsevier B.V. All rights reserved.
ISSN 0927-538X
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