Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2005:5: Default Risk, Systematic Risk and Thai Firms Before, During and After the Asian Crisis

Hans Byström (), Lugkana Worasinchai and Srisuda Chongsithipol
Additional contact information
Hans Byström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Lugkana Worasinchai: School of Business, Bangkok University, Postal: School of Business, Bangkok University, 40/4 Rama IV Klong-Toey, Bangkok, Thailand 10110
Srisuda Chongsithipol: Graduate School, Bangkok University, Postal: Graduate School, Bangkok University, 40/4 Rama IV Klong-Toey, Bangkok, Thailand 10110

Abstract: This paper applies the Merton (1974) default probability model to the firms in the SET-50 index at the Stock Exchange of Thailand (SET). It also examines the rela- tionship between a firm's default probability and firm-specific characteristics like size and book-to-market ratio, and whether default risk is systematic or not. We believe this to be the first paper dealing with these issues using data from an emerging country. The study also differs from other studies by dealing with how the default risk of firms in different sec- tors of the economy changes during a severe crisis. Overall, we find a significant increase in market based default probabilities around the crisis and a fairly slow return to pre-crisis levels. The first sector to suffer a deterioration in creditworthiness was the sector of finance and securities firms and the worst effected sector at the peak of the Asian crisis was the building materials sector. There are further some indications of the most distressed firms being on average somewhat smaller than the least distressed, but only during the crisis. We do not find significant evidence of the book-to-market ratio being related to the default risk in this particular market, though. Finally, if default risk is systematic, one would expect that default risk is rewarded by higher returns. However, in this sample the level of default risk of a firm does not seem to be able to explain the firm's subsequent realized returns at different horizons. We therefore reject the hypothesis that default risk is systematic.

Keywords: Thailand; stock market; default probabilities

JEL-codes: C20; G33

15 pages, August 31, 2004

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