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Are corporate bond market returns predictable?

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  • Hong, Yongmiao
  • Lin, Hai
  • Wu, Chunchi

Abstract

This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds.

Suggested Citation

  • Hong, Yongmiao & Lin, Hai & Wu, Chunchi, 2012. "Are corporate bond market returns predictable?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2216-2232.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2216-2232
    DOI: 10.1016/j.jbankfin.2012.04.001
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    More about this item

    Keywords

    Return predictability; Generalized spectrum; Autocorrelation; Causality; Nonlinearity; Bond pricing; Market efficiency;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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