Bonds Efficiency
Journal of Banking & Finance 36 (2012) 2216–2232
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Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf
Are corporate bond market returns predictable?
Yongmiao Hong a,b, Hai Lin c,d, Chunchi Wu e,⇑ a Department of Economics, Cornell University, Ithaca, NY 14853, USA Wang Yanan Institute for Studies in Economics and MOE Key Laboratory in Econometrics, Xiamen University, Xiamen 361005, China c Department of Accountancy and Finance, University of Otago, Dunedin 9054, New Zealand d School of Economics and Finance, Victoria University of Wellington, Wellington 6140, New Zealand e School of Management, State University of New York at Buffalo, Buffalo, NY 14260, USA b a r t i c l e
i n f o
a b s t r a c t
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. Ó 2012 Elsevier B.V. All rights reserved.
Article history: Received 8 July 2011 Accepted 1 April 2012 Available online 6 April 2012 JEL classification: G12 G14 G17 Keywords: Return predictability Generalized spectrum Autocorrelation Causality Nonlinearity Bond pricing Market efficiency
1. Introduction One of the most enduring issues in finance and economics is the question of
Contents lists available at SciVerse ScienceDirect
Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf
Are corporate bond market returns predictable?
Yongmiao Hong a,b, Hai Lin c,d, Chunchi Wu e,⇑ a Department of Economics, Cornell University, Ithaca, NY 14853, USA Wang Yanan Institute for Studies in Economics and MOE Key Laboratory in Econometrics, Xiamen University, Xiamen 361005, China c Department of Accountancy and Finance, University of Otago, Dunedin 9054, New Zealand d School of Economics and Finance, Victoria University of Wellington, Wellington 6140, New Zealand e School of Management, State University of New York at Buffalo, Buffalo, NY 14260, USA b a r t i c l e
i n f o
a b s t r a c t
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. Ó 2012 Elsevier B.V. All rights reserved.
Article history: Received 8 July 2011 Accepted 1 April 2012 Available online 6 April 2012 JEL classification: G12 G14 G17 Keywords: Return predictability Generalized spectrum Autocorrelation Causality Nonlinearity Bond pricing Market efficiency
1. Introduction One of the most enduring issues in finance and economics is the question of