Cross-Stock Return Predictability
Log in to collectAcademic paper
Economic Links from Bonds and Cross-Stock Return Predictability
Jian Feng; Xiaolin Huo; Xin Liu; Yifei Mao
- HKUniversity of Hong Kong
- ?HKU Business School, The University of Hong Kong
- Renmin University of China
- ?School of Finance, Renmin University of China
- SC Johnson (United States)
- Cornell University
- ?Cornell University - SC Johnson College of Business - Finance Department
Strategy in a nutshell
This strategy links U.S. stocks to peer firms whose corporate bonds exhibit rating comovement. Monthly peer returns are calculated, and focal firms are sorted into quintiles; the strategy goes long top quintile and short bottom quintile.
Economic rationale
Credit-rating comovement provides insights overlooked by equity analysts due to bond-equity market segmentation. This lag in equity response creates cross-firm return predictability, particularly when investors trade both stocks and bonds of the same firm.
Backtest performance
Annualised return4.16%
Volatility7.9%
Sharpe ratio0.53