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Sentiment and Corporate Bond Valuations before and after the Onset of the Credit Crisis

Jing-Zhi Huang, Marco Rossi and Yuan Wang
The Journal of Fixed Income Summer 2015, 25 (1) 34-57; DOI: https://doi.org/10.3905/jfi.2015.25.1.034
Jing-Zhi Huang
is McKinley Professor of Business and professor of finance at Smeal College of Business, Penn State University in University Park, PA.
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  • For correspondence: jxh56@psu.edu
Marco Rossi
is a visiting assistant professor of finance at Texas A&M University in College Station, TX.
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  • For correspondence: mrossi@mays.tamu.edu
Yuan Wang
is an assistant professor of finance at Concordia University in Montreal, QC, Canada.
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  • For correspondence: yuan.wang@concordia.ca
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Abstract

Stock market sentiment is an important driver of corporate bond valuations. Using transactions from the Trading and Compliance Engine (TRACE), the authors find that sentiment is negatively related to bond yield spreads, with the impact being stronger after the onset of the recent financial crisis. The negative effect of sentiment on yields is stronger when fundamental risk and liquidity frictions are higher, which points to a direct role of sentiment in the bond market whereby rational bond investors are unable in these high-risk/high-friction scenarios to correct the mispricing generated by other bond investors. The authors also find that the sentiment effect is stronger when the returns to capital structure arbitrage are higher, suggesting that sentiment also spills over to the bond market through the activity of invesinvestors dedicated to correcting relative stock and bond value mispricings within the same firm. They further provide evidence that after the onset of the crisis, sentiment also helps explain the extent to which the corporate bond market and the equity market are integrated.

TOPICS: Fixed income and structured finance, financial crises and financial market history

  • © 2015 Pageant Media Ltd
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The Journal of Fixed Income: 25 (1)
The Journal of Fixed Income
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Summer 2015
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Sentiment and Corporate Bond Valuations before and after the Onset of the Credit Crisis
Jing-Zhi Huang, Marco Rossi, Yuan Wang
The Journal of Fixed Income Jun 2015, 25 (1) 34-57; DOI: 10.3905/jfi.2015.25.1.034

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Sentiment and Corporate Bond Valuations before and after the Onset of the Credit Crisis
Jing-Zhi Huang, Marco Rossi, Yuan Wang
The Journal of Fixed Income Jun 2015, 25 (1) 34-57; DOI: 10.3905/jfi.2015.25.1.034
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