Credit Risk-Return Puzzle: Asian Countries Representative

Abstract

<p>This research investigates the presence of Credit Risk-Return Puzzle on Indonesia, China, Japan and Singapore, by analyzing the relationship between credit risk and stock return with the utilization of credit ratings from Moody’s to represent credit risk. The data comprises of monthly data from January 2001 to December 2015, compiled in an unbalanced panel and then regressed with the Hausman-Taylor Estimator due to the presence of time-invariant variables such as countries and country classifications within the dataset.</p><p>The results from this research show that Credit Risk-Return Puzzle exists in both developed and developing market for long-term credit ratings, proven by the negative relationship between stock return and credit ratings. On the other hand Credit Risk-Return Puzzle does not exist in the case of credit rating changes in terms of direction but do show some signs of existence through difference in magnitude, as different reasons underlying credit rating changes such as leverage changes can change the direction of stock price movement.</p><p> </p><p><strong>K</strong><strong>ey</strong><strong>w</strong><strong>ords</strong><strong>: </strong>credit risk-return puzzle, credit rating announcements, credit risk, impact of rating changes, decoupling-recoupling hypothesis</p>