Economic Links from Bonds and Cross-Stock Return Predictability

83 Pages Posted: 28 Mar 2022 Last revised: 6 Nov 2023

See all articles by Jian Feng

Jian Feng

HKU Business School, The University of Hong Kong

Xiaolin Huo

University of International Business and Economics (UIBE)

Xin Liu

School of Finance, Renmin University of China

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department

Hong Xiang

The Hong Kong Polytechnic University

Date Written: March 2, 2022

Abstract

Identifying firms’ bond-market-specific economic links through credit-rating comovement of their corporate bonds, a long-short strategy for stocks based on these links generates a risk-adjusted alpha of 0.45% per month, which cannot be explained by existing economic links in the literature. Market segmentation between the equity and bond markets appears to be the underlying mechanism: (i) The cross-return predictability is muted in the bond market; (ii) The cross-return predictability is mitigated in the presence of cross-holding investors; (iii) Equity analysts slowly incorporate information from rating-comovement links to their forecasts.

Keywords: Economic linkage, cross-firm return predictability, credit-rating comovement, market segmentation, market inefficiency

JEL Classification: G12, G14, G23, G24

Suggested Citation

Feng, Jian and Huo, Xiaolin and Liu, Xin and Mao, Yifei and Xiang, Hong, Economic Links from Bonds and Cross-Stock Return Predictability (March 2, 2022). Available at SSRN: https://ssrn.com/abstract=4047776 or http://dx.doi.org/10.2139/ssrn.4047776

Jian Feng

HKU Business School, The University of Hong Kong ( email )

Hong Kong
China

Xiaolin Huo

University of International Business and Economics (UIBE)

Beijing
China

Xin Liu (Contact Author)

School of Finance, Renmin University of China ( email )

Room 307A
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department ( email )

Ithaca, NY 14850
United States

Hong Xiang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
504
Abstract Views
1,841
Rank
105,641
PlumX Metrics