Anomalies and market (dis)integration

Jaewon Choi, Yongjun Kim

Research output: Contribution to journalArticlepeer-review

39 Scopus citations

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.

Original languageEnglish
Pages (from-to)16-34
Number of pages19
JournalJournal of Monetary Economics
Volume100
DOIs
StatePublished - Dec 2018

Keywords

  • Credit risk
  • Cross-sectional corporate bond returns
  • Hedge ratio
  • Market integration

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