Equity · Global · stocks · Yearly Free

Do Stock Returns Really Decrease With Default Risk?

Academic paper

Do Stock Returns Really Decrease with Default Risk? New International Evidence

AuthorsKevin Aretz; Chris Florackis; Alexandros Kostakis

Institute

Digital Research Alliance of Canada
Alliance Manchester Business School
University of Liverpool
University of Liverpool (UK)
University of Manchester
University of Liverpool Management School
University of Manchester - Manchester Business School

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2314280

Strategy in a nutshell

This strategy estimates 12-month default probabilities for firms in 14 countries using LOGIT models and adjusted Campbell indicators. Stocks are sorted by default risk, forming quintile portfolios; the strategy goes long high-risk and short low-risk stocks.

Economic rationale

Default risk premiums vary across countries based on creditor protections and shareholder power. Riskier distressed firms, especially with high asset tangibility, offer higher premiums. The non-diversifiable, systematic component of default risk primarily drives returns.

Entry & exit

Entry

On each month, make_on_day sets target weights for EWZ, FXI, EWT, EWY, EIDO, THD, EPHE, ECH, EPOL, EZA (+2 more). Read engine.set_target_weights in the lab code for the exact signal.

Exit

A name is exited when its target weight is set to 0 (or the whole dict is empty = cash). Fills use 5 bps commission and 2 bps slippage.

Market data required

Needs at least 60 adjusted daily closes on EWZ, FXI, EWT, EWY, EIDO, THD (+6 more) before the first signal is ready. ETF columns print on exchange sessions only. The lab loads Yahoo Finance via backtest.data.load_daily_prices.

Symbols

EWZ, FXI, EWT, EWY, EIDO, THD, EPHE, ECH, EPOL, EZA, ARGT, TUR

Frequency

Yearly · Daily adjusted close; signals rebalance on the month change (last available session)

History needed

≥ 60 trading days per symbol (about 3 months), plus a few extra bars so the first signal can fire.

Fields

Adjusted close (Yahoo auto_adjust)
Session date index

Credentials

None for paper and the onsite lab
Broker or exchange API keys only for live orders

APIs & providers

Quant Buffet Data API

The lab calls load_daily_prices for the ASSETS panel of adjusted closes, then caches CSV so backtests replay the same series.

Provider: backtest.data.load_daily_prices
Auth: None for paper / sandbox backtests
Endpoints: load_daily_prices(ASSETS, start="2000-01-01")

API / docs → /en/docs/data-api

Yahoo Finance via yfinance

US equities and ETFs, adjusted OHLCV, free for research (rate limits apply).

Provider: yfinance → Yahoo Finance
Auth: None for public history
Endpoints: Ticker.history / yf.download(auto_adjust=True)

API / docs → github.com/ranaroussi/yfinance

Onsite backtest IDE

Quant Buffet native backtest IDE

Edit and run Quant Buffet Python for Do Stock Returns Really Decrease With Default Risk? in the browser. Results update live with equity, drawdown, and metrics charts. Allowed: backtest.data, backtest.engine, backtest.metrics, numpy, pandas. Define ASSETS and make_on_day(prices). Shortcut: Ctrl+Enter. API docs →

IDE · 43 lines

"""
Quant Buffet interactive lab — do-stock-returns-really-decrease-with-default-risk
Allowed: backtest.data / backtest.engine / backtest.metrics, numpy, pandas.
Required: a module-level ASSETS list, and def make_on_day(prices) returning (on_day, ready)
"""
from __future__ import annotations

import numpy as np
import pandas as pd

from backtest.data import load_daily_prices
from backtest.engine import EngineConfig, PortfolioEngine
from backtest.metrics import compute_metrics

ASSETS = ['EWZ', 'FXI', 'EWT', 'EWY', 'EIDO', 'THD', 'EPHE', 'ECH', 'EPOL', 'EZA', 'ARGT', 'TUR']
REBALANCE_ONCE = False

def make_on_day(prices: pd.DataFrame):
    cols = [c for c in ASSETS if c in prices.columns]
    state = {"last": None, "done": False}

    def on_day(engine: PortfolioEngine, dt: pd.Timestamp) -> None:
        available = [s for s in cols if pd.notna(prices.at[dt, s])]
        if not available:
            return
        if REBALANCE_ONCE:
            if state["done"]:
                return
            state["done"] = True
            engine.set_target_weights(dt, {s: 1.0 / len(available) for s in available})
            return
        key = (dt.year, dt.month)
        if state["last"] == key:
            return
        state["last"] = key
        engine.set_target_weights(dt, {s: 1.0 / len(available) for s in available})

    counts = prices[cols].notna().sum(axis=1)
    need = max(1, len(cols) // 2)
    eligible = counts[counts >= need]
    ready = eligible.index.min() if not eligible.empty else None
    return on_day, ready

"""
Quant Buffet interactive lab — do-stock-returns-really-decrease-with-default-risk
Allowed: backtest.data / backtest.engine / backtest.metrics, numpy, pandas.
Required: a module-level ASSETS list, and def make_on_day(prices) returning (on_day, ready)
"""
from __future__ import annotations

import numpy as np
import pandas as pd

from backtest.data import load_daily_prices
from backtest.engine import EngineConfig, PortfolioEngine
from backtest.metrics import compute_metrics

ASSETS = ['EWZ', 'FXI', 'EWT', 'EWY', 'EIDO', 'THD', 'EPHE', 'ECH', 'EPOL', 'EZA', 'ARGT', 'TUR']
REBALANCE_ONCE = False

def make_on_day(prices: pd.DataFrame):
    cols = [c for c in ASSETS if c in prices.columns]
    state = {"last": None, "done": False}

def on_day(engine: PortfolioEngine, dt: pd.Timestamp) -> None:
        available = [s for s in cols if pd.notna(prices.at[dt, s])]
        if not available:
            return
        if REBALANCE_ONCE:
            if state["done"]:
                return
            state["done"] = True
            engine.set_target_weights(dt, {s: 1.0 / len(available) for s in available})
            return
        key = (dt.year, dt.month)
        if state["last"] == key:
            return
        state["last"] = key
        engine.set_target_weights(dt, {s: 1.0 / len(available) for s in available})

counts = prices[cols].notna().sum(axis=1)
    need = max(1, len(cols) // 2)
    eligible = counts[counts >= need]
    ready = eligible.index.min() if not eligible.empty else None
    return on_day, ready

Quant Buffet syntax cheat sheet (copy / insert)

Paste these fragments into the editor. The sandbox rejects QuantConnect, os, and network libraries.

Required imports

Only these libraries are allowed in the sandbox.

from __future__ import annotations

import numpy as np
import pandas as pd

from backtest.data import load_daily_prices
from backtest.engine import EngineConfig, PortfolioEngine
from backtest.metrics import compute_metrics

ASSETS list (whitelisted ETFs)

Module-level list. Tickers must be in the Quant Buffet whitelist.

ASSETS = ["SPY", "QQQ", "TLT", "GLD", "BIL"]

make_on_day contract

Must return (on_day, ready). on_day calls engine.set_target_weights.

def make_on_day(prices: pd.DataFrame):
    cols = [c for c in ASSETS if c in prices.columns]
    sma = prices[cols].rolling(200, min_periods=200).mean()
    state = {"last": None}

    def on_day(engine: PortfolioEngine, dt: pd.Timestamp) -> None:
        if sma.loc[dt].isna().all():
            return
        key = (dt.year, dt.month)
        if state["last"] == key:
            return
        state["last"] = key
        long = [
            s for s in cols
            if pd.notna(prices.at[dt, s]) and pd.notna(sma.at[dt, s])
            and prices.at[dt, s] > sma.at[dt, s]
        ]
        weights = {} if not long else {s: 1.0 / len(long) for s in long}
        engine.set_target_weights(dt, weights)

    ready = sma.dropna(how="all").index.min() if sma.notna().any().any() else None
    return on_day, ready

Set target weights

Weights should sum to about 1.0. Empty dict = 100% cash.

engine.set_target_weights(dt, {"SPY": 0.60, "BIL": 0.40})

Live backtest performance

CAGR

4.87%

Sharpe

0.32

Max DD

-63.05%

Vol

25.08%

Sortino

0.48

Beta

1.06

Run the backtest to populate charts.

Order records

Run the backtest to load every order fill alongside performance.

Export to your platform

Transform Quant Buffet lab code (ASSETS + make_on_day / PortfolioEngine) into native classes for a third-party IDE — then copy and paste.

Target platform

Run in: QuantConnect Cloud or LEAN CLI · QCAlgorithm with Equity securities and monthly rebalance.

Detected pattern: Custom / hybridAssets: EWZ, FXI, EWT, EWY, EIDO, THD, EPHE, ECH, EPOL, EZA, ARGT, TUR

# Generated from Quant Buffet → QuantConnect LEAN
# Strategy: Do Stock Returns Really Decrease With Default Risk?
# Detected pattern: Custom / hybrid
# Source uses Quant Buffet lab APIs (ASSETS + make_on_day / PortfolioEngine).
# Review fees, data, and risk before live trading — educational export only.

from AlgorithmImports import *


class QuantBuffetExport(QCAlgorithm):
    def Initialize(self):
        self.SetStartDate(2010, 1, 1)
        self.SetCash(100000)
        tickers = ["EWZ", "FXI", "EWT", "EWY", "EIDO", "THD", "EPHE", "ECH", "EPOL", "EZA", "ARGT", "TUR"]
        self.symbols = []
        for t in tickers:
            if "-" in t:  # crypto proxy e.g. BTC-USD
                self.symbols.append(self.AddCrypto(t.replace("-USD", ""), Resolution.Daily).Symbol)
            else:
                self.symbols.append(self.AddEquity(t, Resolution.Daily).Symbol)
        self.Schedule.On(
            self.DateRules.MonthStart(self.symbols[0]),
            self.TimeRules.AfterMarketOpen(self.symbols[0], 30),
            self.Rebalance,
        )
        # Logic: Custom Quant Buffet logic — adapt the signal block to match your lab on_day().

    def Rebalance(self):
        # Pattern: custom — Custom Quant Buffet logic — adapt the signal block to match your lab on_day().
        # Default: equal-weight. Port your make_on_day weights here via SetHoldings.
        w = 1.0 / len(self.symbols) if self.symbols else 0.0
        for symbol in self.symbols:
            self.SetHoldings(symbol, w)

Exported code uses the platform’s native classes and libraries. Install dependencies in your third-party IDE, then run. Validate before live trading.