Bonds vs. Equities: Information for Investment

47 Pages Posted: 10 May 2021

See all articles by Huifeng Chang

Huifeng Chang

University of California, Los Angeles (UCLA) - Department of Economics

Adrien d'Avernas

Swedish House of Finance

Andrea L. Eisfeldt

UCLA Anderson School of Management

Date Written: April 15, 2021

Abstract

We provide robust empirical evidence that uncovers the reason for the observed closer relationship between the bond market versus the equity market and the macroeconomy. Our results indicate that the tight bond market-macroeconomy link is not due to differences in the investor base, but instead to the unique transformations of asset volatility and leverage that credit spreads and equity volatility represent. We focus on the investment channel. Using firm-level data, we find that the sensitivity of investment to equity volatility is highly significant, but changes sign in the cross section of firms depending on their distance to default. This sign change confounds aggregate inference. We rationalize these findings using a simple structural model of credit risk and investment with debt overhang.

Keywords: Volatility, Credit Spread, Leverage, Debt Overhang, Investment

JEL Classification: E22, E44, G12, G32

Suggested Citation

Chang, Huifeng and d'Avernas, Adrien and Eisfeldt, Andrea L., Bonds vs. Equities: Information for Investment (April 15, 2021). Available at SSRN: https://ssrn.com/abstract=3841206 or http://dx.doi.org/10.2139/ssrn.3841206

Huifeng Chang (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Adrien D'Avernas

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

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