Explaining the Default Risk Premium Anomaly Using Two Beta Model

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FOROUGHI DARIUSH; AMIRI HADI; Sadreddin Ebrahim

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Journal: JOURNAL OF ASSET MANAGEMENT AND FINANCING Year:2019 | Volume:7 | Issue:3 (26) Page(s): 45-58

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Title

Explaining the Default Risk Premium Anomaly Using Two Beta Model

Author(s)

FOROUGHI DARIUSH | AMIRI HADI | Sadreddin Ebrahim | Issue Writer Certificate

Keywords

Default risk Ohlson’s Probabilistic Prediction Model of Default CashQ1

Flow Risk Discount Rate RiskQ1

Abstract

Objective: Given some failures of the Capital Asset Pricing Model in explaining the default risk anomaly, some researchers have claimed the two-beta model, established by Campbell and Vulteenaho (2004), is functionally able to explain this peculiarity. Originated primarily from CAPM, two-beta model decomposes the market beta to the discount-rate beta and the cash-flow beta. In other words, the two beta model decomposes the systematic risk to the discount-rate and cash-flow risk. Method: In an attempt to test the ability of the model to explain the anomaly in the Tehran Sthock Exchange, we firstly ranked firms based on their default risks, measured by Ohlson’ s (1980) model, and then employed the two-beta model to decompose the market beta to discount-rate beta and cash-flow beta. We, ultimately, applied a simple regression model to extract the discount-rate risk premium and cash-flow risk premium. Results: Our results reveal that as the default risk increases, the discount-rate beta increases and the cash-flow beta decreases. Furthermore, the cash-flow risk premium is significantly more than the discount-rate risk premium. Therefore, the two-beta model can explain the anomalous default risk existing in the Tehran Exchange Security.

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APA: Copy

FOROUGHI, DARIUSH, AMIRI, HADI, & Sadreddin, Ebrahim. (2019). Explaining the Default Risk Premium Anomaly Using Two Beta Model. JOURNAL OF ASSET MANAGEMENT AND FINANCING, 7(3 (26) ), 45-58. SID. https://sid.ir/paper/245576/en

Vancouver: Copy

FOROUGHI DARIUSH, AMIRI HADI, Sadreddin Ebrahim. Explaining the Default Risk Premium Anomaly Using Two Beta Model. JOURNAL OF ASSET MANAGEMENT AND FINANCING[Internet]. 2019;7(3 (26) ):45-58. Available from: https://sid.ir/paper/245576/en

IEEE: Copy

DARIUSH FOROUGHI, HADI AMIRI, and Ebrahim Sadreddin, “Explaining the Default Risk Premium Anomaly Using Two Beta Model,” JOURNAL OF ASSET MANAGEMENT AND FINANCING, vol. 7, no. 3 (26) , pp. 45–58, 2019, [Online]. Available: https://sid.ir/paper/245576/en

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