Correlation between Individual Stock and Corporate Bond Returns

53 Pages Posted: 29 Jan 2014

See all articles by Belen Nieto

Belen Nieto

University of Alicante

Rosa Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: January 27, 2014

Abstract

This paper studies the correlations between individual bond and stock returns issued by the same firm using Trading Reporting and Compliance Engine prices. We employ panel data to analyze the determinants of the variation in estimated dynamic correlations using macroeconomic cycle indicators, firm risk measures, and specific bond characteristics. The results show that the correlations vary both over time and cross-sectionally. Specifically, aggregate factors approximating economic growth are not related to changes in correlations, but correlations decrease with negative expectations about future aggregate risks, although only for firms with a low default probability. However, the correlations are higher when the stock idiosyncratic risk and/or firm financial leverage increases. In contrast, the relation between correlations and the systematic stock risk is negative.

Keywords: individual corporate bonds, stock–bond return correlation, idiosyncratic risk, economic cycles

JEL Classification: G12, G14

Suggested Citation

Nieto, Belen and Rodriguez, Rosa, Correlation between Individual Stock and Corporate Bond Returns (January 27, 2014). Available at SSRN: https://ssrn.com/abstract=2386043 or http://dx.doi.org/10.2139/ssrn.2386043

Belen Nieto (Contact Author)

University of Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, Alicante 03690
Spain

Rosa Rodriguez

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

HOME PAGE: http://www.business.uc3m.es/en/faculty/profesor/perfil/42

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