Momentum Spillover from Stocks to Corporate Bonds

47 Pages Posted: 22 Aug 2012 Last revised: 20 Jul 2017

See all articles by Daniel Haesen

Daniel Haesen

Robeco Investment Research

Patrick Houweling

Robeco Investment Research

Jeroen van Zundert

BlueCove Limited

Date Written: January 27, 2017

Abstract

We investigate and improve momentum spillover from stocks to corporate bonds, i.e. the phenomenon that past winners in the equity market are future winners in the corporate bond market. We find that a momentum spillover strategy exhibits strong structural and time-varying default risk exposures that cause a drag on the profitability of the strategy and lead to large drawdowns if the market cycle turns from a bear to a bull market. By ranking companies on their firm-specific equity return, instead of their total equity return, the default risk exposures halve, the Sharpe ratio doubles and the drawdowns are substantially reduced.

Keywords: corporate bond, momentum, time-varying risk, residual return

JEL Classification: G11, G12, G14

Suggested Citation

Haesen, Daniel and Houweling, Patrick and van Zundert, Jeroen, Momentum Spillover from Stocks to Corporate Bonds (January 27, 2017). Journal of Banking and Finance, 2017, Vol. 79. Available at SSRN: https://ssrn.com/abstract=2131032 or http://dx.doi.org/10.2139/ssrn.2131032

Daniel Haesen (Contact Author)

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31 10 224 7167 (Phone)

HOME PAGE: http://www.robeco.com/quant

Patrick Houweling

Robeco Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31-10-2243538 (Phone)

HOME PAGE: http://www.robeco.com/quant

Jeroen Van Zundert

BlueCove Limited ( email )

10 New Burlingtonstreet
London
United Kingdom

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