Credit Risk-Return Puzzle: Asian Countries Representative

Faurani Santi Singagerda, Tulus Suryanto, Jesscia Christina Sudjana

Abstract


This  research  investigates  the  presence  of  Credit  Risk-Return  Puzzle  on  Indonesia,  China, Japan and Singapore,  by analyzing  the relationship  between  credit risk and stock return with the utilization of credit ratings from Moody’s to represent credit risk. The data comprises of monthly data from January 2001 to December 2015, compiled in an unbalanced panel and then regressed with the Hausman-Taylor  Estimator  due to the presence  of time-invariant  variables  such as countries  and country classifications within the dataset.

The results from this research show that Credit Risk-Return Puzzle exists in both developed and  developing  market for long-term  credit ratings, proven by the negative  relationship  between  stock return and credit ratings. On the other hand Credit Risk-Return Puzzle does not exist in the case of credit rating changes in terms of direction but do show some signs of existence through difference in magnitude,  as  different  reasons  underlying  credit  rating  changes  such  as  leverage  changes  can change the direction of stock price movement.

 

Keywords: credit risk-return puzzle, credit rating announcements, credit risk, impact of rating changes, decoupling-recoupling hypothesis


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References


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DOI: http://dx.doi.org/10.26675/jabe.v1i1.9747

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