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Anomalies and Market (Dis)Integration

  • Jaewon Choi Department of Finance, University of Illinois at Urbana-Champaign, 515 E. Gregory Dr., Champaign, IL, 61820, United States.
  • Yongjun Kim College of Business Administration, University of Seoul, 163 Seoulsiripdae-ro, Dongdaemun-gu, Seoul, 02504, Republic of Korea.
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 insight to examine market integration between equity and corporate bonds in the cross section. Some variables (e.g., protability and net issuance) that explain equity returns do not explain bond returns, and for others (e.g., investment and momentum) cross-sectional bond returns are too large to be explained by their loadings, or hedge ratios, on equity returns of the same rms. The risk premia of the standard factors estimated using bond returns tend to dier from those estimated using equity returns. We also nd that discrepancies in return premia increase when noisy investor demand and short-sale impediments are stronger.

  • Jaewon Choi
  • Yongjun Kim
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 insight to examine market integration between equity and corporate bonds in the cross section. Some variables (e.g., protability and net issuance) that explain equity returns do not explain bond returns, and for others (e.g., investment and momentum) cross-sectional bond returns are too large to be explained by their loadings, or hedge ratios, on equity returns of the same rms. The risk premia of the standard factors estimated using bond returns tend to dier from those estimated using equity returns. We also nd that discrepancies in return premia increase when noisy investor demand and short-sale impediments are stronger.
Market Integration, Credit Risk, Hedge Ratio, Cross-sectional Corporate Bond Returns.