RT Journal Article
SR Electronic
T1 Equity Momentum in European Credits
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2020.1.097
DO 10.3905/jfi.2020.1.097
A1 Hendrik Kaufmann
A1 Philip Messow
YR 2020
UL https://pm-research.com/content/early/2020/04/15/jfi.2020.1.097.abstract
AB The authors investigate the phenomenon that past winners in the stock market are potential future winners in the European bond market. By using a dataset of EUR denominated bonds for the IG and HY market since 2000, the authors show that the stock market leads the bond market as well as rating changes. The authors design long-only strategies with strong equity momentum exposure. A trading strategy based on these findings has an alpha of up to 1.77% (6.93%) in IG (HY). Firms with positive (negative) equity momentum have an improving (deteriorating) rating in the future. This leads to the conclusion that an under-reaction of the bond market to the firm specific information about changing default risk is a likely source of the spillover effect.TOPICS: Exchanges/markets/clearinghouses, fixed income and structured financeKey Findings• We find a strong positive relationship between equity momentum and future returns for EUR denominated corporate bonds.• Our strategy leads to alphas up to 1.77% (6.93%) in IG (HY).• Equity momentum is able to screen out bonds that are being downgraded within the next year.