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A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios

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  • Robert Goldberg

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    This paper presents a macro-economic methodology for evaluating the forward-looking Sharpe Ratios of the equity and debt components of the United States public company capital structure. Using this framework, it is shown that the equity and debt Sharpe Ratios are both time variant and disparate. The methodology is used to review the risk aversion behavior of equity and debt market participants surrounding the past three major market events, the 1987 crash, the 2000–2001 Internet bubble and the 2008–2009 credit crisis. The forward-looking Sharpe Ratios are used to construct a dynamic portfolio of stocks and corporate bonds that outperforms a static portfolio on a risk-adjusted basis. This paper then offers market segmentation and the differing behavior of equity and corporate bond investors as an explanation for the observed Sharpe Ratios. Copyright Springer Science+Business Media New York 2015

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    File URL: http://hdl.handle.net/10.1007/s11156-013-0424-2
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    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 44 (2015)
    Issue (Month): 4 (May)
    Pages: 733-754

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    Handle: RePEc:kap:rqfnac:v:44:y:2015:i:4:p:733-754
    DOI: 10.1007/s11156-013-0424-2
    Contact details of provider: Web page: http://springer.com

    Order Information: Web: http://www.springer.com/finance/journal/11156/PS2

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