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Anomalies and market (dis)integration

Jaewon Choi and Yongjun Kim

Journal of Monetary Economics, 2018, vol. 100, issue C, 16-34

Abstract: If equity and corporate bond markets are integrated, risk premia in one market should appear in the other, and their magnitudes should be consistent with each other. We use this powerful insight to test market integration. Some variables (e.g., profitability and net issuance) fail to explain bond returns, and for others (e.g., investment and momentum) bond return premia are too large compared with their loadings, or hedge ratios, on equity returns of the same firms. The risk premia of standard factors tend to differ between the two markets. Market integration weakens when noisy investor demand and short-sale impediments are stronger.

Keywords: Market integration; Credit risk; Hedge ratio; Cross-sectional corporate bond returns (search for similar items in EconPapers)
JEL-codes: G12 G12 G13 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:moneco:v:100:y:2018:i:c:p:16-34