Using the credit spread as an option-risk factor: Size and value effects in CAPM

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dc.contributor.authorHwang, Young-Soonko
dc.contributor.authorMin, Hong Ghiko
dc.contributor.authorMcDonald, Judith A.ko
dc.contributor.authorKim, Hwagyunko
dc.contributor.authorKim, Bong-Hanko
dc.date.accessioned2011-11-08-
dc.date.available2011-11-08-
dc.date.created2012-02-06-
dc.date.created2012-02-06-
dc.date.issued2010-12-
dc.identifier.citationJOURNAL OF BANKING FINANCE, v.34, pp.2995 - 3009-
dc.identifier.issn0378-4266-
dc.identifier.urihttp://hdl.handle.net/10203/25489-
dc.description.abstractThis paper takes an option-theoretic approach to explain why pricing anomalies are observed when traditional CAPM is used. By extending CAPM to incorporate the option-risk factor of stocks, we show that stockholders' limited liability can explain Fama and French's size and value effects. We use bonds' excess credit spread as a proxy for stocks' default risk to control for the changing non-diversifiable option-risk characteristic of stocks. Because sensitivity to the excess credit spread becomes smaller as size increases and as value decreases, excess credit spread explains the CAPM anomalies in a fashion similar to the Fama-French factors. While the excess credit spread is significant in explaining Fama and French's size and value effects, adding the Fama-French factors does not improve the performance of our model. Our revised model resembles conditional CAPM, but it offers a more intuitive explanation for the size and value effects. (C) 2010 Elsevier B.V. All rights reserved.-
dc.description.sponsorshipWe are very grateful to the editor and an anonymous referee for their valuable comments and excellent suggestions.We would also like to thank Kenneth French for providing data on his homepage. All remaining errors are our own.en
dc.languageEnglish-
dc.language.isoen_USen
dc.publisherELSEVIER SCIENCE BV-
dc.subjectASSET PRICING MODEL-
dc.subjectCROSS-SECTION-
dc.subjectCORPORATE LIABILITIES-
dc.subjectMULTIVARIATE TESTS-
dc.subjectTEMPORAL BEHAVIOR-
dc.subjectCONDITIONAL CAPM-
dc.subjectSYSTEMATIC-RISK-
dc.subjectYIELD SPREADS-
dc.subjectDEFAULT RISK-
dc.subjectRETURNS-
dc.titleUsing the credit spread as an option-risk factor: Size and value effects in CAPM-
dc.typeArticle-
dc.identifier.wosid000283411300014-
dc.identifier.scopusid2-s2.0-77956942575-
dc.type.rimsART-
dc.citation.volume34-
dc.citation.beginningpage2995-
dc.citation.endingpage3009-
dc.citation.publicationnameJOURNAL OF BANKING FINANCE-
dc.embargo.liftdate9999-12-31-
dc.embargo.terms9999-12-31-
dc.contributor.localauthorMin, Hong Ghi-
dc.contributor.nonIdAuthorHwang, Young-Soon-
dc.contributor.nonIdAuthorMcDonald, Judith A.-
dc.contributor.nonIdAuthorKim, Hwagyun-
dc.contributor.nonIdAuthorKim, Bong-Han-
dc.type.journalArticleArticle; Proceedings Paper-
dc.subject.keywordAuthorCredit spread-
dc.subject.keywordAuthorOption-risk factor-
dc.subject.keywordAuthorCAPM-
dc.subject.keywordAuthorSize effect-
dc.subject.keywordAuthorValue effect-
dc.subject.keywordPlusASSET PRICING MODEL-
dc.subject.keywordPlusCROSS-SECTION-
dc.subject.keywordPlusCORPORATE LIABILITIES-
dc.subject.keywordPlusMULTIVARIATE TESTS-
dc.subject.keywordPlusTEMPORAL BEHAVIOR-
dc.subject.keywordPlusCONDITIONAL CAPM-
dc.subject.keywordPlusSYSTEMATIC-RISK-
dc.subject.keywordPlusYIELD SPREADS-
dc.subject.keywordPlusDEFAULT RISK-
dc.subject.keywordPlusRETURNS-
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