How Similar Are the Factor Structures of Equity and Credit Markets?

Abstract

We borrow 150+ signals from the asset pricing literature on stock returns to empirically explore factor trends in bond and CDS markets and their interactions with stock markets. We document a strong similarity in the rank-order of overall factor performance across equity and credit markets. Equity and credit factor time series correlations are largely driven by the factor's exposure to credit risk. After accounting for heightened market and credit risk, equity and credit factor structures decouple during market downturns. These insights shed light on trends in credit factors and the systematic component of the equity-credit relationship, offering valuable perspectives for systematic investment strategies in credit markets.

Keywords: Bond Markets, CDS Markets, Equity-Credit Integration, Factor Investing

JEL Classification: G11, G12, G14, G40