Stock and Bond Market Interaction: Does Momentum Spill Over?

37 Pages Posted: 13 Jul 2002

See all articles by William R. Gebhardt

William R. Gebhardt

affiliation not provided to SSRN

Soeren Hvidkjaer

Copenhagen Business School

Bhaskaran Swaminathan

LSV Asset Management

Date Written: November 2002

Abstract

This paper examines the interaction between momentum in equities and corporate bonds. We find that investment grade corporate bonds do not exhibit momentum at the three to twelve month horizons; rather there is evidence of reversals. There is, however, significant evidence of a momentum spillover from equities to investment grade corporate bonds of the same firm. Specifically, firms earning high (low) equity returns over the previous year earn high (low) bond returns the following year. The spillover results are stronger among firms with lower-grade debt and higher equity trading volume, and are robust to various risk and liquidity controls. In examining the source of the spillover, we find that the bond ratings of firms with positive equity momentum continue to improve in the future suggesting that delayed reaction to the information in past equity prices about declining default risk is a likely source of the spillover effect.

JEL Classification: G14

Suggested Citation

Gebhardt, William R. and Hvidkjaer, Soeren and Swaminathan, Bhaskaran, Stock and Bond Market Interaction: Does Momentum Spill Over? (November 2002). Available at SSRN: https://ssrn.com/abstract=319009 or http://dx.doi.org/10.2139/ssrn.319009

William R. Gebhardt

affiliation not provided to SSRN

Soeren Hvidkjaer (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

HOME PAGE: http://www.hvidkjaer.net

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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