Does Economic Uncertainty Affect Default Risk? Evidence from Mutual Fund Fire Sale Episodes
Firms with high sensitivity to economic uncertainty (uncertainty beta) can be desirable for the investors as a hedging tool, which increases the demand for these stocks. High sensitivity to economic uncertainty can alleviate the flow-driven trading (price) pressure created by mutual funds when they sell their stock holdings. It can also hedge the stock against risk of fire sales by mutual funds in times of increased economic turmoil. This increase in demand for the stock is substantial enough to have real consequences for the firm. Our distance-to-default analyses indicate that high sensitivity to economic uncertainty reduces firm’s likelihood of default
Year of publication: |
2022
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Authors: | Colak, Gonul ; Malik, Ali |
Publisher: |
[S.l.] : SSRN |
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