We examine the impact of the unobservable systematic risk factor on default prediction model performance. We find that … including the unobservable systematic risk factor might help improve predictive accuracy, but it might not help improve rank … ordering of firms by default risk. Rank ordering is mainly driven by firm-level variables, while predictive accuracy is …

This paper analyzes the influence of downside risk on defaultable bond returns. By introducing a defaultable bond …-trading model, we show that the decline in market risk tolerance and information accuracy leads to trading loss under downside … conditions. Our empirical analysis indicates that downside risk can explain a large proportion of the variation in yield spreads …