Do Stocks Lead Bonds? New Evidence from Corporate Bond Etfs
66 Pages Posted: 27 Aug 2024
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Do Stocks Lead Bonds? New Evidence from Corporate Bond ETFs
Abstract
This paper studies the dynamic information flows between stocks and corporate bonds. Using accurately measured returns on corporate bond exchange-traded funds (ETFs), we find that returns on portfolios of bond-issuing firms’ stocks positively predict corporate bond ETF returns, but not vice versa. Inspired by these findings, we apply the adaptive LASSO to aggregate information from these bond-linked stocks, resulting in a signal with strong predictive power for ETF returns. By contrast, a randomly formed stock portfolio does not predict the ETF returns. These results provide fresh evidence on the notion of gradual information diffusion across different asset classes.
Keywords: Market Efficiency, ETF, Stocks, Bonds' Lead-Lag Relationship
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