Economic links from bonds and cross-stock return predictability

Jian Feng, Xiaolin Huo, Xin Liu, Yifei Mao and Hong Xiang

Journal of Financial Economics, 2025, vol. 171, issue C

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: Market segmentation; Cross-asset information spillover; Economic linkage; Cross-firm return predictability; Bond rating comovement (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:171:y:2025:i:c:s0304405x25001187

DOI: 10.1016/j.jfineco.2025.104110

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