Date of Award


Degree Type




First Advisor

Kamath, Ravindra

Subject Headings

Default (Finance), Rate of return, Banks and banking, Corporations -- Finance, Default risk, Equity returns, Industrial and economic cycle decomposition


The relationship between default risk and equity returns is investigated in this study from an industrial and economic cycle decomposition point of view. The portfolio approach and Fama-MacBeth regression are used in the analysis. This dissertation provides evidence that investors charged a premium for stocks with both lower and higher credit risks. However, the specific relationship is different across industries and economic cycles. This study also notices two unique patterns of the banking industry when it comes to default risk. First, higher default risks are more likely to be compensated by higher returns. Second, as compared to other industries, the higher default risk of the banking industry is accompanied with larger banks furthermore, this positive relationship only exists during the post-1980 period. The Granger Causality tests suggest that the default risk of the banking industry is more likely to cause the default risk of other industries, not vice versa. The significance of this causality is related to an industry's dependence on the banking industry. This study further explores the possibility whether the change of bank default risk is a systematic risk. The empirical results from the Fama-MacBeth approach show that the change of bank default risk affects the equity returns of other industries only during the economic contraction stages. In addition, this effect is slightly negative, indicating that during the economic contraction periods the increase of bank default risk actually drives funds to flow from the banking industry to other industries in a period as short as one month

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