Daily Academic Alpha: Bond Beta and Alpha

/Daily Academic Alpha: Bond Beta and Alpha

Daily Academic Alpha: Bond Beta and Alpha

By | 2017-08-18T17:07:42+00:00 March 17th, 2015|Uncategorized|0 Comments

Is the Cross-Section of Expected Bond Returns Influenced by Equity Return Predictors?

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.

An Empirical Analysis of Stock and Bond Market Liquidity

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.

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
  • Join thousands of other readers and subscribe to our blog.
  • This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

Print Friendly, PDF & Email

About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

Leave A Comment