The relationship between equity and bond returns: An empirical investigation

Amer Demirovic, Cherif Guermat and Jon Tucker

Journal of Financial Markets, 2017, vol. 35, issue C, 47-64

Abstract: The correlation between equity and corporate debt is ambiguous. News affecting the value of a firm's assets induces a positive correlation, whereas an increase in the volatility of a firm's assets induces a negative correlation. We examine the conditional correlation between these two securities. While the average correlation is positive, the conditional correlation increases with credit risk, and decreases with equity volatility. Our results are consistent with the thesis that the equity bond relation is dependent on the potential wealth transfer between stock and debt holders. Nevertheless, this relation seems to break down during periods of extreme market uncertainty.

Keywords: Equity-bond correlation; Distance to default; Equity volatility (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:35:y:2017:i:c:p:47-64

DOI: 10.1016/j.finmar.2017.08.001

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