In this paper, we explain momentum profits using innovations in aggregate economy-wide default risk. First, we show that momentum returns are positive only during high default shocks and nonexistent otherwise. Second, we present evidence suggesting that a conditional default shock factor is...

This paper shows that the well-documented distress anomaly does not hold in market downturns. The asset beta and financial leverage of distressed stocks rise significantly during bear markets, resulting in a dramatic increase in their equity beta. Hence, a long/short healthy-minus-distressed...

We investigate the link between distress and idiosyncratic volatility. Specifically, we examine the twin puzzles of anomalously low returns for high idiosyncratic volatility stocks and high distress risk stocks, documented by Ang et al (2006) and Campbell et al (2008), respectively. We document...

Asset-pricing facts on FOMC announcements have changed strikingly in the last decade. The pre-announcement drift has disappeared, and other known facts - the announcement premium and a stronger CAPM - now concentrate on a subset of announcements. We propose these distinct patterns correspond to...

The impact of a stress scenario of default events on the loss distribution of a credit portfolio can be assessed by determining the loss distribution conditional on these events. While it is conceptually easy to estimate loss distributions conditional on default events by means of Monte Carlo...

We characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals' holdings inside and outside the pension system, we find substantial heterogeneity within and between passive and active investors in terms of labor income, financial wealth,...

We highlight important and specific characteristics of default risk and methodological implications. In a simulation contrasting independent, Gaussian and Clayton copulas, we also show that joint default probabilities might be a hidden source of risk in conventional portfolio models of default