Investor sentiment, flight-to-quality, and corporate bond comovement

Sebastian Bethke, Monika Gehde-Trapp and Alexander Kempf

CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: We examine the dynamics of bond correlation using a broad sample of US corporate bonds, and document that bond correlation varies heavily over time. We attribute this variation in bond correlation to variation in risk factor correlation reflecting time-varying flight-to-quality behavior of investors. We show that risk factor correlation increases when investor sentiment decreases, i.e., corporate bond investors exhibit stronger flight-to-quality when their sentiment is low. Thus, low investor sentiment leads to flightto- quality behavior and, ultimately, high bond correlation.

Keywords: bond correlation; risk factor correlation; flight-to-quality; investor sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ger
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:1306r3

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