Alpha and the Risk of Failure: Can Abnormal Returns be Explained by the Risk of Failure?

This study aims to test, on a specific sample, if abnormal returns or alpha, as defined by the Capital Asset Pricing Model (CAPM) and the Fama-French Three Factor Model (FF-TFM), can be explained by the risk of failure measured using the Skogsvik probability of default model. The study tests data over a 20 year period for 133 Swedish listed companies within the sectors manufacturing, quarrying and mining, and IT.