The Integration of Financial Markets

Is the relationship between assets traded in different markets in line with predictions of the theoretical models? An empirical investigation reveals that the theoretical models fail to fully explain the relationships between the values of firm-level stocks and corporate bonds.

Figure. The implied impact of equity volatility and credit risk on the conditional correlation between firm-level stock and bond returns.

Related article:

Demirovic, A., Tucker, J., Guermat, C. (2017) The Relationship between Equity and Bond Returns: An Empirical Investigation, Journal of Financial Markets, Vol. 35-C, pp. 47-64. https://doi.org/10.1016/j.finmar.2017.08.001.