• 「FEEL」 Hwang, Y., Min, H., McDonald, J., Kim, H., and Kim, B. (2010), “Using the Credit Spread as an Option-Risk Factor: Size and Value Effects in CAPM”, Journal of Banking and Finance, Vol. 34, pp. 2995-3009.

    Lab: Financial Economics and Engineering Lab.

    Professor: Hong-Ghi Min

    Title: Using the Credit Spread as an Option-Risk Factor: Size and Value Effects in CAPM

    Authors: Young-Soon Hwang, Hong-Ghi Min, Judith A. McDonald, Hwangyun Kim, Bong-Han Kim

    Journal:  Journal of Banking and Finance

    Publish: 2010


    This paper takes an option-theoretic approach to explain why pricing anomalies are observed when traditional CAPM is used. By extending CAPM to incorporate the option-risk factor of stocks, we show that stockholders’ limited liability can explain Fama and French’s size and value effects. We use bonds’ excess credit spread as a proxy for stocks’ default risk to control for the changing non-diversifiable option-risk characteristic of stocks. Because sensitivity to the excess credit spread becomes smaller as size increases and as value decreases, excess credit spread explains the CAPM anomalies in a fashion similar to the Fama–French factors. While the excess credit spread is significant in explaining Fama and French’s size and value effects, adding the Fama–French factors does not improve the performance of our model. Our revised model resembles conditional CAPM, but it offers a more intuitive explanation for the size and value effects.


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