How Integrated Are Corporate Bond and Stock Markets?

59 Pages Posted: 25 Feb 2020 Last revised: 22 Jun 2022

See all articles by Mirela Sandulescu

Mirela Sandulescu

University of Michigan, Ross School of Business

Date Written: November 1, 2019


I propose a model-free measure of the extent of relative market integration between U.S.
corporate bonds and stocks of their issuers. My measure is both consistent with no-arbitrage
and financial frictions, and quantifies pricing consistency across markets. I document that
trading frictions, often imposed on market participants, including transaction costs and short-selling
constraints, yield realistic optimal portfolio positions. Overall, my evidence indicates
U.S. stock and corporate bond markets are non-trivially integrated, by an extent between 50%
and 90% of a model-free full-integration benchmark, depending on the severity of financial
frictions, firm characteristics, and the risk-bearing capacity of financial intermediaries.

Keywords: stochastic discount factor, corporate bonds, stocks, market integration, firm characteristics.

JEL Classification: G11, G12, G14

Suggested Citation

Sandulescu, Mirela, How Integrated Are Corporate Bond and Stock Markets? (November 1, 2019). Ross School of Business Paper Forthcoming, Swiss Finance Institute Research Paper No. 20-09, Available at SSRN: or

Mirela Sandulescu (Contact Author)

University of Michigan, Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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