Abstract

This paper documents a new high risk-low return puzzle. Specfically, we find that a forward-looking risk measure extracted from credit line undrawn spreads negatively predicts borrowers' future stock returns. This negative risk-return relation is separate from previously documented asset pricing puzzles related to idiosyncratic volatility, analyst forecast dispersion, and credit risk. A long-short strategy based on this finding generates a significant alpha of over 7% per annum.

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