Daily Academic Alpha: Bond Beta and Alpha
We study whether commonly analyzed equity return predictors also predict corporate bond returns. Bond markets do price risk, but also are susceptible to delayed information transmission relative to equities. Specifically, equity market capitalization and firm profitability negatively predict bond returns, while bonds of firms with high idiosyncratic volatility earn higher average returns. Equity returns positively predict bond returns with a one-month lag. Consistent with a relatively sophisticated institutional clientele, bonds are efficiently priced in that our return predictors do not provide profitable trading strategies after accounting for transactions costs.
This article explores cross-market liquidity dynamics by estimating a vector autoregressive model for liquidity (bid-ask spread and depth, returns, volatility, and order flow in the stock and Treasury bond markets). Innovations to stock and bond market liquidity and volatility are significantly correlated, implying that common factors drive liquidity and volatility in these markets. Volatility shocks are informative in predicting shifts in liquidity. During crisis periods, monetary expansions are associated with increased liquidity. Moreover, money flows to government bond funds forecast bond market liquidity. The results establish a link between “macro” liquidity, or money flows, and “micro” or transactions liquidity.
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Definitions of common statistics used in our analysis are available here (towards the bottom)