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Liquidity Risk and Momentum Spillover
from Stocks to Bonds

Hai Lin, Junbo Wang and Chunchi Wu
The Journal of Fixed Income Summer 2013, 23 (1) 5-42; DOI: https://doi.org/10.3905/jfi.2013.23.1.005
Hai Lin
is an associate professor of finance in the School of Economics and Finance at Victoria University of Wellington in Wellington, New Zealand.
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  • For correspondence: hai.lin@vuw.ac.nz
Junbo Wang
is an associate professor of finance in the Department of Economics and Finance at the City University of Hong Kong in Kowloon, HKSAR.
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  • For correspondence: jwang2@cityu.edu.hk
Chunchi Wu
is M&T Chair in Banking and Finance in the Department of Finance and Managerial Economics, School of Management, at State University of New York at Buffalo in Buffalo, NY.
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  • For correspondence: chunchiw@buffalo.edu
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Abstract

This article investigates the role of liquidity risk in the momentum spillover from stocks to bonds by using a large data sample. The evidence strongly suggests that liquidity risk is an important determinant of momentum spillover returns. This finding is robust to controls for effects of trading liquidity, credit risk, behavioral factors, and bond characteristics. On average, liquidity risk explains about 40% of momentum spillover profits for investment-grade bonds and 55% for speculative-grade bonds over the 16-year sample period. A significant portion of momentum spillover returns can be viewed as compensation for investors’ exposure to liquidity risk when engaging in trading this anomaly.

TOPICS: Fixed income and structured finance, analysis of individual factors/risk premia

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The Journal of Fixed Income: 23 (1)
The Journal of Fixed Income
Vol. 23, Issue 1
Summer 2013
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Liquidity Risk and Momentum Spillover
from Stocks to Bonds
Hai Lin, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Jun 2013, 23 (1) 5-42; DOI: 10.3905/jfi.2013.23.1.005

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Liquidity Risk and Momentum Spillover
from Stocks to Bonds
Hai Lin, Junbo Wang, Chunchi Wu
The Journal of Fixed Income Jun 2013, 23 (1) 5-42; DOI: 10.3905/jfi.2013.23.1.005
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  • Article
    • Abstract
    • DATA
    • MOMENTUM SPILLOVER FROM STOCKS TO BONDS
    • PRICING LIQUIDITY RISK WITH MOMENTUM SPILLOVER PORTFOLIOS
    • MOMENTUM SPILLOVERS IN DIFFERENT STATES
    • CONCLUSIONS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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