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Anomalies and market (dis)integration

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  • Choi, Jaewon
  • Kim, Yongjun

Abstract

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 powerful insight to test market integration. Some variables (e.g., profitability and net issuance) fail to explain bond returns, and for others (e.g., investment and momentum) bond return premia are too large compared with their loadings, or hedge ratios, on equity returns of the same firms. The risk premia of standard factors tend to differ between the two markets. Market integration weakens when noisy investor demand and short-sale impediments are stronger.

Suggested Citation

  • Choi, Jaewon & Kim, Yongjun, 2018. "Anomalies and market (dis)integration," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 16-34.
    • Handle: RePEc:eee:moneco:v:100:y:2018:i:c:p:16-34
    DOI: 10.1016/j.jmoneco.2018.06.003
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    More about this item

    Keywords

    Market integration; Credit risk; Hedge ratio; Cross-sectional corporate bond returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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