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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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zhang, Tai-Wei & Wu, Wei-Hwa, 2014. "The asymmetric predictability of high-yield bonds," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 146-155.
    2. Gu, Rongbao & Shao, Yanmin, 2016. "How long the singular value decomposed entropy predicts the stock market? — Evidence from the Dow Jones Industrial Average Index," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 453(C), pages 150-161.
    3. Lin, Hai & Wang, Junbo & Wu, Chunchi, 2014. "Predictions of corporate bond excess returns," Journal of Financial Markets, Elsevier, vol. 21(C), pages 123-152.
    4. repec:eee:reveco:v:51:y:2017:i:c:p:174-192 is not listed on IDEAS
    5. 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.
    6. Tolikas, Konstantinos, 2016. "The relative informational efficiency of corporate retail bonds: Evidence from the London Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 191-201.
    7. Juan Benjamín Duarte Duarte & Juan Manuel Mascare?nas Pérez-Iñigo, 2014. "Comprobación de la eficiencia débil en los principales mercados financieros latinoamericanos," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, November.
    8. repec:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0063-6 is not listed on IDEAS
    9. Shynkevich, Andrei, 2016. "Predictability in bond returns using technical trading rules," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 55-69.
    10. repec:eee:intfin:v:51:y:2017:i:c:p:39-57 is not listed on IDEAS
    11. repec:eee:phsmap:v:484:y:2017:i:c:p:215-224 is not listed on IDEAS
    12. repec:eee:eneeco:v:69:y:2018:i:c:p:101-110 is not listed on IDEAS
    13. Huang, Henry H. & Wang, Kent & Wang, Zhanglong, 2016. "A test of efficiency for the S&P 500 index option market using the generalized spectrum method," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 52-70.

    More about this item

    Keywords

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

    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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