How Integrated Are Corporate Bond and Stock Markets?

49 Pages Posted: 25 Feb 2020 Last revised: 11 Mar 2020

See all articles by Mirela Sandulescu

Mirela Sandulescu

University of Michigan, Ross School of Business

Date Written: November 1, 2019

Abstract

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

Sandulescu, Mirela, How Integrated Are Corporate Bond and Stock Markets? (November 1, 2019). Swiss Finance Institute Research Paper No. 20-09, Available at SSRN: https://ssrn.com/abstract=3528252 or http://dx.doi.org/10.2139/ssrn.3528252

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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