Advances in Economics and Business Vol. 4(12), pp. 667 - 673
DOI: 10.13189/aeb.2016.041205
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Credit Risk and Lottery-type Stocks: Evidence from Taiwan


Lu Chia-Wu *
Department of Finance and Cooperative Management, National Taipei University, Taiwan

ABSTRACT

This study explores the effect of credit risk on the lottery-type stocks with Taiwan's data during the sample period 2001 to 2010. The lottery-type stocks are identified as the criteria referring to Kumar [1], which have characters of lower stock price, higher idiosyncratic volatility, and higher idiosyncratic skewness. Refer to Merton [2] and Vassalou & Xing [3], a firm's credit risk is proxied by the DLI (default likelihood indicators). The main results show that the lottery-type stocks have higher default probabilities, smaller firm sizes and higher B/M (book to market) ratio comparing to the non-lottery type ones. By adding default likelihood indicator into the Carhart [4] model, the empirical results demonstrate that a firm's credit situation change has significant negative effect on return of equity; lottery-type stocks equity returns are less sensitive to default risk going higher. Furthermore, this research also shows there exists a structure change resulted from the financial tsunami, indicating the investors require more positive excess returns to compensate their risk for holding stocks after 2008 financial crisis.

KEYWORDS
Lottery-type Stock, Credit Risk, Idiosyncratic Risk

Cite this paper
Lu Chia-Wu . "Credit Risk and Lottery-type Stocks: Evidence from Taiwan." Advances in Economics and Business 4.12 (2016) 667 - 673. doi: 10.13189/aeb.2016.041205.