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Are corporate bond market returns predictable?

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

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 8 ()
Pages: 2216-2232

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2216-2232

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Return predictability; Generalized spectrum; Autocorrelation; Causality; Nonlinearity; Bond pricing; Market efficiency;

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References

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  1. Yongmiao Hong & Yoon-Jin Lee, 2005. "Generalized Spectral Tests for Conditional Mean Models in Time Series with Conditional Heteroscedasticity of Unknown Form," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 499-541.
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Cited by:
  1. Tsai, Hui-Ju, 2014. "The informational efficiency of bonds and stocks: The role of institutional sized bond trades," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 34-45.

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