This paper examines the relation between momentum in equities and corporate bonds. The market for corporate bonds is large, both in size and breadth; indeed, at the of end of 1996, according to the Lehman Fixed Income Database (LIFB), there were more than 1,500 investment grade bonds (rating of BBB or higher) trading with an aggregate face value exceeding 250 billion dollars. Yet, there are relatively few studies examining the cross-sectional predictability of returns in the corporate bond market.
Corporate bonds have the added advantage that they are linked to the equity market at the firm level. Bonds and stocks are different claims to the same underlying operating cash flows, and are, therefore, affected by the same fundamental risk although to varying degrees. This makes corporate bonds a potentially attractive setting to examine the robustness of momentum effects.
As is well known, Jegadeesh and Titman (1993) document a pervasive momentum effect in equity markets: past three to twelve-month winners outperform past three to twelve-month losers over the next twelve months. These results have been a source of great controversy in the literature because, taken at face value, they present a challenge to market efficiency. While there is much research on momentum in equity markets, very few studies have examined momentum in other asset classes.
An exception is Cutler, Poterba, and Summers (1991) who examine predictability in various asset classes including stocks, bonds, currencies, real estate, and metals, and find that most markets are positively auto correlated at intermediate horizons of two to twelve months and negatively auto correlated at longer horizons. Their findings, however, focus on the time-series predictability of aggregate returns not cross-sectional predictability, as in studies of stock momentum.
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Stock and Bond Market Interaction: Does Momentum Spill Over?
