Correlation between Individual Stock and Corporate Bond Returns
53 Pages Posted: 29 Jan 2014
Date Written: January 27, 2014
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: Suggested Citation