Journal article

Is default risk priced in Australian equity? Exploring the role of the business cycle

Howard Chan, Robert Faff, Paul Kofman

AUSTRALIAN JOURNAL OF MANAGEMENT | SAGE PUBLICATIONS LTD | Published : 2011

Abstract

Using an extensive Australian sample, we explore two related issues in the context of a default risk asset-pricing factor (DEF) over the business cycle: (a) whether a DEF can explain the size premium in the three-factor Fama-French (FF) model; and (b) whether a DEF has a separate role itself in a four-factor version of the FF model. While we find that the default factor does not explain the success of size, our evidence shows it has a complementary role to small minus big and high minus low. Notably, subgroups of test portfolios likely to seriously challenge any asset-pricing model show evidence that the four-factor model is not perfect. Finally, while we find that conditioning on the busine..

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University of Melbourne Researchers