Momentum Across the Capital Structure

Abstract

Bond and equity markets are populated by specialized investor clienteles with different information sets, shaping how risk is priced and how information flows across the capital structure. Using 160 matched bond-stock factor pairs, we show that lagged bond factor returns predict matched stock factor returns with a 9.0% annual six-factor alpha. Bond-to-stock spillovers are strongest at the systematic factor level; stock-to-bond spillovers are strongest at the firm level. Spillovers strengthen in market stress, concentrate in credit-sensitive factors, and weaken when bond and equity clienteles overlap. Our findings illuminate the factor-level dynamics of cross-asset information transmission.

Keywords: JEL Classification: G11, G12, G14, G40 Factor Investing, Factor Momentum, Cross-Market Spillovers, Bond Markets, Equity-Credit Integration, Price Discovery, Merton Model