A1655
Title: Co-explosiveness of equity prices and corporate credit spreads
Authors: Marco Kerkemeier - University of Hagen (Germany) [presenting]
Abstract: It is well known that correlations between different asset class returns tend to increase during boom periods and the subsequent financial turmoil. Therefore, the desired portfolio diversification significantly suffers and does not offer the protection a risk-averse investor desires. In this vein, it is relevant to investigate if stock prices and corporate credit spreads (BBB yields minus AAA yields, corporate yields minus sovereign yields) are co-explosive. When the end of a boom period is foreseeable, institutional investors mostly shift their investments to higher-rated bonds (flight-to-quality). Thus, the yields on high-rated bonds drop while the yields on low-rated bonds increase due to selling pressure, triggering the spreads' explosiveness. There is a lot of research concerning the explosiveness of stock markets, but only limited research concerning bond spreads explosiveness. Combining these two areas as a novel line of research provides valuable insights concerning portfolio diversification and potential warning signs or insights for hedging activities. In particular, it is essential to understand if explosive phases of spreads are driven by explosiveness in stock prices or vice versa or if they even occur simultaneously. Based on these findings, different hedging/protection mechanisms are required.
