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The relationship between equity and bond returns: An empirical investigation

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  • Demirovic, Amer
  • Guermat, Cherif
  • Tucker, Jon

Abstract

The correlation between equity and corporate debt is ambiguous. News affecting the value of a firm's assets induces a positive correlation, whereas an increase in the volatility of a firm's assets induces a negative correlation. We examine the conditional correlation between these two securities. While the average correlation is positive, the conditional correlation increases with credit risk, and decreases with equity volatility. Our results are consistent with the thesis that the equity bond relation is dependent on the potential wealth transfer between stock and debt holders. Nevertheless, this relation seems to break down during periods of extreme market uncertainty.

Suggested Citation

  • Demirovic, Amer & Guermat, Cherif & Tucker, Jon, 2017. "The relationship between equity and bond returns: An empirical investigation," Journal of Financial Markets, Elsevier, vol. 35(C), pages 47-64.
  • Handle: RePEc:eee:finmar:v:35:y:2017:i:c:p:47-64
    DOI: 10.1016/j.finmar.2017.08.001
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    References listed on IDEAS

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    Cited by:

    1. van Zundert, Jeroen, 2018. "Empirical studies on the cross-section of corporate bond and stock markets," Other publications TiSEM 338205fc-a031-4e06-a636-9, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Equity-bond correlation; Distance to default; Equity volatility;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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

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