Momentum Spillover from Stocks to Corporate Bonds
47 Pages Posted: 22 Aug 2012 Last revised: 20 Jul 2017
Date Written: January 27, 2017
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: Suggested Citation