How Integrated Are Corporate Bond and Stock Markets?
49 Pages Posted: 25 Feb 2020 Last revised: 11 Mar 2020
Date Written: November 1, 2019
In this paper, I study the degree of market integration between US corporate bonds and stocks of the corresponding issuing firms, accounting for their characteristics. I find that short-selling constraints are essential restrictions to optimal Sharpe ratio portfolios that yield admissible portfolio positions and implied pricing errors within quoted bid-ask spreads. My empirical evidence suggests that markets are more integrated for larger firms, with more liquid corporate bonds and stocks. Similarly, firms that are more leveraged, have a higher asset growth and profitability feature a greater extent of integration between their debt and equity securities.
Keywords: stochastic discount factor, corporate bonds, stocks, market integration, firm characteristics
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation