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The relationship between equity and bond returns: An empirical investigation

Tucker, Jon; Guermat, Cherif; Demirovic, Amer


Amer Demirovic


© 2017 Elsevier B.V. The correlation between equity and corporate debt is ambiguous. News affecting the value of a firm's assets induces a positive correlation, whereas an increase in the volatility of a firm's assets induces a negative correlation. We examine the conditional correlation between these two securities. While the average correlation is positive, the conditional correlation increases with credit risk, and decreases with equity volatility. Our results are consistent with the thesis that the equity bond relation is dependent on the potential wealth transfer between stock and debt holders. Nevertheless, this relation seems to break down during periods of extreme market uncertainty.


Tucker, J., Guermat, C., & Demirovic, A. (2017). The relationship between equity and bond returns: An empirical investigation. Journal of Financial Markets, 35, 47-64.

Journal Article Type Article
Acceptance Date Aug 16, 2017
Online Publication Date Aug 19, 2017
Publication Date Sep 1, 2017
Journal Journal of Financial Markets
Print ISSN 1386-4181
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 35
Pages 47-64
Keywords equity-bond correlation, distance to default, equity volatility
Public URL
Publisher URL


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