IDEAS home Printed from
   My bibliography  Save this article

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


  • Robert Goldberg



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

Suggested Citation

  • Robert Goldberg, 2015. "A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios," Review of Quantitative Finance and Accounting, Springer, vol. 44(4), pages 733-754, May.
  • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:4:p:733-754
    DOI: 10.1007/s11156-013-0424-2

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Georges Dionne & Geneviève Gauthier & Khemais Hammami & Mathieu Maurice & Jean-Guy Simonato, 2010. "Default Risk in Corporate Yield Spreads," Financial Management, Financial Management Association International, vol. 39(2), pages 707-731, June.
    3. Peña Sánchez de Rivera, Juan Ignacio & Forte, Santiago, 2006. "Credit spreads: theory and evidence about the information content of stocks, bonds and cdss," DEE - Working Papers. Business Economics. WB wb063310, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    4. Laurence Fung & Chi-sang Tam & Ip-wing Yu, 2008. "Changes in Investors' Risk Appetite - An Assessment of Financial Integration and Interdependence," Working Papers 0812, Hong Kong Monetary Authority.
    5. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. Cheung, C Sherman & Kwan, Clarence C Y & Lee, Jason, 1995. "The Pricing of Exchange Rate Risk and Stock Market Segmentation: The Canadian Case," Review of Quantitative Finance and Accounting, Springer, vol. 5(4), pages 393-402, December.
    8. K. Lam & Wei Li, 2004. "Is the ‘Perfect’ Timing Strategy Truly Perfect?," Review of Quantitative Finance and Accounting, Springer, vol. 22(1), pages 39-51, January.
    9. Long Chen & Pierre Collin-Dufresne & Robert S. Goldstein, 2009. "On the Relation Between the Credit Spread Puzzle and the Equity Premium Puzzle," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3367-3409, September.
    10. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
    11. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    12. Forte, Santiago & Peña, Juan Ignacio, 2009. "Credit spreads: An empirical analysis on the informational content of stocks, bonds, and CDS," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2013-2025, November.
    13. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
    14. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-537, October.
    15. Robert-Paul Berben & W. Jos Jansen, 2005. "Bond Market and Stock Market Integration in Europe," DNB Working Papers 060, Netherlands Central Bank, Research Department.
    16. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December.
    17. Avino, Davide & Lazar, Emese, 2012. "Rethinking Capital Structure Arbitrage," MPRA Paper 42850, University Library of Munich, Germany.
    18. Frankfurter, George M & Phillips, Herbert E & Faulk, Greg, 1999. "The Ex Post Performance of Four Portfolio Selection Algorithms," Review of Quantitative Finance and Accounting, Springer, vol. 13(4), pages 347-366, December.
    19. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    20. Darren Duxbury & Robert Hudson & Kevin Keasey & Zhishu Yang & Songyao Yao, 2013. "How prior realized outcomes affect portfolio decisions," Review of Quantitative Finance and Accounting, Springer, vol. 41(4), pages 611-629, November.
    21. Sheridan Titman, 2002. "The Modigliani and Miller Theorem and the Integration of Financial Markets," Financial Management, Financial Management Association, vol. 31(1), Spring.
    22. Anonymous, 2005. "Leslie A. Whitener," Amber Waves, United States Department of Agriculture, Economic Research Service, April.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Asset allocation; Equity premium; Debt premium; Sharpe Ratio; Market segmentation; G11; G12; G14;

    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:44:y:2015:i:4:p:733-754. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.