Understanding the Equity-Corporate Bond Nexus: A Framework for Risk Decomposition and Interest Rate Hedging

Mathis Linger, Jamyang-Dorje Bhutia, Axel Pinçon and Marcel-Cristian Voia ()
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Mathis Linger: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne
Jamyang-Dorje Bhutia: Drakai Capital
Axel Pinçon: Drakai Capital
Marcel-Cristian Voia: LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne

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Abstract: This study explores the complex dynamics between equity and corporate bond markets, focusing on their correlation's decomposition into credit risk and interest rate sensitivity components. By utilizing equity-credit default swap and equity-sovereign bond correlations, this research identifies macroeconomic factors—such as growth and inflation uncertainties—that influence these interactions across different credit qualities and market regimes. Empirical findings reveal significant variations in the equity-corporate bond correlation during periods of market stress and rising interest rates. Additionally, we propose two novel dynamic hedging strategies, leveraging adaptive hedge ratios to isolate credit risk while mitigating interest rate exposure. The results demonstrate that these strategies outperform traditional approaches, offering robust tools for portfolio management amidst fluctuating economic conditions.

Date: 2025-09-30
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Published in Journal of fixed income, 2025, 35 (2), pp.22-40. ⟨10.3905/jfi.2025.1.210⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05397359

DOI: 10.3905/jfi.2025.1.210

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