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Credit Risk and Anomalies in Pakistan’s Stock Market
Author(s) -
Qayyum Abdul,
Suh Jungwon
Publication year - 2019
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12280
Subject(s) - credit risk , credit rating , credit default swap index , business , stock (firearms) , itraxx , financial economics , stock market , credit default swap , monetary economics , economics , credit valuation adjustment , financial system , actuarial science , credit reference , geography , context (archaeology) , archaeology
This paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000–2017. Using credit ratings as a proxy for credit risk, we find that the credit risk–stock return relation is negative in Pakistan, as low‐rated stocks (i.e., those with high credit risk) earn lower returns than high‐rated stocks (i.e., those with low credit risk). This negative relation is robust to alternative measures of credit risk (e.g., Altman’s Z ‐score and the distance‐to‐default) and is also maintained even after controlling for size, momentum, and liquidity effects. Our study provides evidence of the default‐risk anomaly in a frontier market that lacks adequate information infrastructure and faces high levels of political and economic uncertainty.