Are corporate bond market returns predictable?

Yongmiao Hong, Hai Lin and Chunchi Wu

Journal of Banking & Finance, 2012, vol. 36, issue 8, 2216-2232

Abstract: This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds.

Keywords: Return predictability; Generalized spectrum; Autocorrelation; Causality; Nonlinearity; Bond pricing; Market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:8:p:2216-2232

DOI: 10.1016/j.jbankfin.2012.04.001

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