Is default risk a systematic risk of Chinese stock markets?

Standard asset pricing models suggest that only systematic risk factors affect the expected returns of stocks. Using the data of Chinese stock markets from 2000 to 2006, this paper estimates the default risks implied in stock prices by structure model, tests whether the expected returns of stocks are related with implied default risks, and examines whether the default risk is a systematic risk factor in China. The estimation results show that the implied default risk increases between 2000 and 2005 and then decreases since 2005. Both the portfolio analysis and regression analysis suggest that the expected returns of stocks are not related with their implied default risk levels. This show evidences that default risk is not a systematic risk factor in China. This finding has useful implications for the understanding of behaviors of Chinese investors and the development of Chinese asset pricing models.