How Integrated Are Corporate Bond and Stock Markets?

41 Pages Posted: 25 Feb 2020 Last revised: 18 Nov 2020

See all articles by Mirela Sandulescu

Mirela Sandulescu

University of Michigan, Ross School of Business

Date Written: November 1, 2019


I study the degree of market integration between U.S. corporate bonds and stocks of their issuers. I document that trading costs and short-selling constraints, which are often imposed on market participants, regularize optimal Sharpe ratio portfolios. These novel trading frictions are consistent with a notion of no-arbitrage with transaction costs. I use a nonparametric approach to circumvent the joint hypothesis test of model specification and market integration. My empirical findings suggest that stocks co-move more strongly with stock-like corporate bonds, especially those of small, growth firms, with lower profitability, liquidity, asset growth, and with higher credit riskiness, leverage and demand for short-selling. Overall, my evidence indicates U.S. stock and corporate bond markets are non-trivially integrated, yet not perfectly so, and especially when the risk-bearing capacity of financial intermediaries is more impaired.

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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