The asymmetric predictability of high-yield bonds |
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| Institution: | 1. Korea University, Republic of Korea;2. University of Exeter, United Kingdom;1. School of Economics, Central University of Finance and Economics, 39 South College Road, Beijing 100081, PR China;2. School of Economics, Renmin University of China, 59 Zhongguancun Street, Beijing 100872, PR China;1. Department of Mathematics, University of Bayreuth, Germany;2. Department of Economics, University of Bayreuth, Germany;3. Public Choice Research Centre, University of Turku, Finland;1. Assistant Professor Department of Computer Science and Engineering Anna University Regional Office, Madurai, Tamilnadu, India;2. Professor Department of Information Technology K.L.N.College of Engineering, Pottapalayam, Sivaganga, Tamil Nadu, India |
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| Abstract: | This study examines the relationship between the high-yield bonds market and the stock market and indicates that stock returns lead high-yield bond returns. Specifically, this study further shows that this lead–lag relationship is more solid during bear market periods since a downward trend in the stock market implies a high likelihood of the exercise of the equity put in short position embedded in a high-yield bond at maturity. We also conducted out-of-sample forecast using a VAR model, an AR model and naïve estimation during bear market and non-bear market periods. Our results demonstrate that high-yield bond returns are better predicted by a VAR model that includes past stock returns than by an AR model or naive estimation during bear market periods, but such is not the case during non-bear market periods. |
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| Keywords: | High-yield bonds Predictability VAR Embedded options Market condition |
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