Abstract

http://ssrn.com/abstract=2298491
 
 

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Sentiment and Corporate Bond Valuations Before and After the Onset of the Credit Crisis


Jing-Zhi Huang


Pennsylvania State University - University Park - Department of Finance

Marco Rossi


University of Notre Dame - Department of Finance

Yuan Wang


John Molson School of Business, Concordia University

September 19, 2013


Abstract:     
This paper studies the impact of stock market sentiment on corporate bond valuations, using yield spreads, spread changes, and bond returns constructed from the Trading and Compliance Engine (TRACE). We find that stock market sentiment spills over to the bond market, but with a differential impact before and after the onset of the recent credit crisis. We find that sentiment negatively predicts bond yield spreads, and the effect is mainly pronounced after the crisis. We further find that the corporate bond market is more integrated with the equity market after the financial crisis, consistent with the intuition that after the crisis investors of both markets tend to share the same sentiment. Finally, in a conditional test, we find the interactions between sentiment and bond spread determinants such as illiquidity, volatility, credit rating and leverage are always negative, indicating that when sentiment is high, investors are likely to neglect fundamental risks; when sentiment is low, investors exaggerate the risks.

Number of Pages in PDF File: 35

Keywords: sentiment, credit crisis, equity/bond market integration

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Date posted: July 26, 2013 ; Last revised: November 18, 2013

Suggested Citation

Huang, Jing-Zhi and Rossi, Marco and Wang, Yuan, Sentiment and Corporate Bond Valuations Before and After the Onset of the Credit Crisis (September 19, 2013). Available at SSRN: http://ssrn.com/abstract=2298491 or http://dx.doi.org/10.2139/ssrn.2298491

Contact Information

Jing-Zhi Jay Huang
Pennsylvania State University - University Park - Department of Finance ( email )
University Park, PA 16802
United States
HOME PAGE: http://www.personal.psu.edu/jxh56
Marco Rossi
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
Yuan Wang (Contact Author)
John Molson School of Business, Concordia University ( email )
Montreal
Canada
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