Intra-Market Correlations in the Bond Markets: Extending Empirical Regularities from the Equity Markets

Abstract

The capital markets in general, and the equity markets in particular, exhibit a well-known phenomenon: During times of distress, intra-market correlations tighten, as traded assets exhibit a greater sensitivity to the "systematic factor." This paper extends that analysis to the corporate bond markets, by demonstrating that the fixed-income markets exhibit that same empirical regularity. Specifically, capitalizing on the liquidity of corporate CDS rates, we use this data to demonstrate how these intra-market correlations tightened during recent periods of crisis. Whereas most components of capital markets have substantially recovered from their crisis magnitudes, our analysis of the distribution of pair-wise CDS correlations demonstrates a recovery from crisis levels -- but, as of 2015, not yet to pre-crisis levels.

Keywords: Correlation within Bond Markets, Crisis vs. Non-Crsis Periods, Contrast of Bond and Equity Markets' Correlations

JEL Classification: G12, G01