While empirical literature has documented a negative relation between default risk and stock returns, the theory … suggests that default risk should be positively priced. We provide an explanation for this "default anomaly", by calculating … components. The systematic part, measured as the PD sensitivity to aggregate default risk, is positively related to stock returns …

extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general …

. Furthermore, we establish two quantitative results. Firstly, modest levels of risk aversion are necessary to match observed debt … ; Collateral ; Income risk ; Bankruptcy …